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how do you explain to a client that business entertainment is not tax deductible?

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What is the best way to explain to a client that business entertainment is not tax deductible? & How to correct this if they have not been doing so?

I can see/ understand this from HMRC website/ accountingweb answers etc but it really isn't all that clear especially to someone who has not studied accounting especially for things like client meetings at Starbucks for a self employed designer who works from home (for example) 

 If a client is a web designer and works from home/ membership club/ coffee shops and so has a lot of small amounts going through for coffees etc when meeting clients for meetings. 

If he has been deducting this for tax. £4000 odd claimed over the years. Am I right in thinking this requires a letter/ separate disclosure to HMRC? we couldn't simply correct on his current self-assessment form?

Thanks in advance,

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By Duhamel
27th Jan 2014 20:43

Terminology
First, I'd be clear that these are HMRC's rules, not yours.
Second, explain the distinction between subsidence, staff entertaining and business entertaining.
Third, HMRC don't allow business entertaining as a deduction against income. There is no further logic behind this, that I am aware of, other than not encouraging parties and frivolous spending.
Fourth, in my opinion I would ignore the history and get it right going forward. Make the client aware it was wrong before and that if there is an investigation into past returns then further tax and penalties might be due. In any event, this can't be corrected by a compensating adjustment in the current year.
Although, I assume this is an unincorporated business, you can revise the 2011/12 return easily before 31 Jan 2014. If they want to pay your fees for correcting the history beyond that then knock yourself out.

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By carnmores
27th Jan 2014 20:53

i hope its not subsidence

:-)

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Replying to Mark Telford:
Man of Kent
By Kent accountant
27th Jan 2014 21:19

I think...

carnmores wrote:

i hope its not subsidence

:-)

...the cracks are starting to show...

...after all its tax return madness season...

 

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By Duhamel
27th Jan 2014 21:03

Just testing...
Perhaps also explain subsistence! Glad you were paying attention Carnmores.

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By carnmores
27th Jan 2014 21:29

as the worst typists on here

i love a bit of competition

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By I'msorryIhaven'taclue
27th Jan 2014 21:44

Stop Me and Buy One?

OP, you say you are worried by Starbucks coffees. Tell me whether you believe a (hypothetical) client's coffee shop expenses (your client's coffees - not any your client might occasionally buy for his prospects) are allowable 'travel and/or subsistence', or disallowable 'business entertaining' in each of the following situations:

1. Your client breaks a long car or rail journey to a trade fair with a refreshing cup of Starbucks;

2. Your client breaks a long car or rail journey to visit a prospective customer, with a refreshing cup of Starbucks;

3. Your client undertakes a long rail journey to visit a prospective customer, but holds off having his refreshing cup of Starbucks until he reaches his destination station;

4. Your client undertakes a long rail journey to visit a prospective customer but, there being no coffee shop at the destination station, arrives early at the coffee shop where he is meeting his prospective customer and has a refreshing cup of Starbucks whilst waiting;

5. Same circumstances as 4 above, only this time your client buys himself a second refreshing cup of Starbucks after his prospective customer has arrived and their meeting is under way;

6. Following on from 5 above, your client returns to the counter to purchase a third refreshing cup of Starbucks for his prospective customer;

7. Your client buys tea, coffee, sugar and milk for his 'office' ie his place of business.

OP, you don't say whether your client is self-employed or trading via a limited company. If the former, then you have the stricter "eat to live" interpretation to contend with. Either way, I take it his place of business is his home. And let's assume all trips above are wholly and necessarily for business.

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Replying to andy.partridge:
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By I'msorryIhaven'taclue
28th Jan 2014 17:51

The Emperor's Cloak?

I'msorryIhaven'taclue wrote:

OP, you say you are worried by Starbucks coffees. Tell me whether you believe a (hypothetical) client's coffee shop expenses (your client's coffees - not any your client might occasionally buy for his prospects) are allowable 'travel and/or subsistence', or disallowable 'business entertaining' in each of the following situations:

1. Your client breaks a long car or rail journey to a trade fair with a refreshing cup of Starbucks;

2. Your client breaks a long car or rail journey to visit a prospective customer, with a refreshing cup of Starbucks;

3. Your client undertakes a long rail journey to visit a prospective customer, but holds off having his refreshing cup of Starbucks until he reaches his destination station;

4. Your client undertakes a long rail journey to visit a prospective customer but, there being no coffee shop at the destination station, arrives early at the coffee shop where he is meeting his prospective customer and has a refreshing cup of Starbucks whilst waiting;

5. Same circumstances as 4 above, only this time your client buys himself a second refreshing cup of Starbucks after his prospective customer has arrived and their meeting is under way;

6. Following on from 5 above, your client returns to the counter to purchase a third refreshing cup of Starbucks for his prospective customer;

7. Your client buys tea, coffee, sugar and milk for his 'office' ie his place of business.

OP, you don't say whether your client is self-employed or trading via a limited company. If the former, then you have the stricter "eat to live" interpretation to contend with. Either way, I take it his place of business is his home. And let's assume all trips above are wholly and necessarily for business.

 

Anyone care to stick their neck out and have a bash? I'm interested to know where others draw the line between subsistence and entertaining. Because it's a matter of interpreting Parliament's Will, then as with any interpretation there must necessarily be a subjective element that would I suppose afford interpretative latitude.

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Replying to andy.partridge:
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By litteblackledger
28th Jan 2014 22:30

Thanks for the points I'msorryIhaven'taclue ;-)

hmmm

1. subsistence

2. client entertainment

3. client entertainment

4. hmmm.

5. client entertainment

6. client entertainment

7. employee subsistence only if company (self employed subsistence only for overnight stays?)

?

 

OP- self employed. place of business is home yes.

 

Would be great if HMRC could address some of this in the upcoming simplifications for smaller businesses 

 

 

 

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By johngroganjga
28th Jan 2014 07:40

I always say that it's just what Parliament in its wisdom has decided should be the case.  That usually ends the discussion there and then.  No need to explain the rationale or get more complicated.  When I get nostalgic I throw in that years ago in my youth I can remember that entertaining of overseas customers was allowable, until Parliament decided that it should no longer be.

And yes of course there can be discussions about whether something is really entertaining, or perhaps just subsistence.

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Stepurhan
By stepurhan
28th Jan 2014 08:48

Advertising

Are a certain famous coffee chain paying for all the mentions that they are getting in this thread? There are 7 mentions in one post alone. What about Costsalot? Caffe Zero? Coffee Monarchy? Even McDougalls are always going on about buying coffee as a change from pushing their meals whose manufacturing processes don't bear close scrutiny.

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By davegibson00
28th Jan 2014 08:58

Explaining it to the client

 

"You cannot claim tax relief on business entertainment.  It's the law.  It may not be sensible or fair, but its the law. You can however claim tax relief on subsistence in certain circumstances..  Here's what they are...."

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By patvanaalst
28th Jan 2014 13:43

Entertaining

Many moons ago, when I was studying, this came up in the tax unit.  I was told at the time, rightly or wrongly, that entertaining wasn't tax deductible as it was considered to be bribery, i.e. to influence the decision of the purchaser to buy (or recommend) your goods/services over your competition's, and therefore you couldn't benefit from that act by saving tax.

Though entertaining is considered the norm in business, I can kind of see the reasoning for HMRC's position!  Of course, the counter argument is that a cup of coffee is hardly going to make someone return to their office raving about you!  But then, where's the line?!?!?  Also, I'd suggest this applies more to larger businesses where buyers are essentially handling someone else's money, unlike owner-managed businesses who would see through it quite quickly.

 

Cheers

Pat

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By johngroganjga
28th Jan 2014 14:00

Agree with all the above except that some people are saying that it is a matter of HMRC policy or interpretation.  But of course it's the will of Parliament - nothing to do with HMRC as such.  Their job is just to apply the law, despite what Margaret Hodge seems to think.

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By carnmores
28th Jan 2014 21:23

you simply say NO

its not allowable and mention the bribery act as well that usually shuts them up

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By WhichTyler
28th Jan 2014 23:13

Q. How do you explain...

A. Frequently

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By AccountancyMarket
28th Jan 2014 23:32

What if.....

What if the designer who works from home, rented a meeting room in a co-working space or business hub in order to hold the meeting with the client? That would be allowable.

But what homeworker can afford to rent a meeting room for each meeting. In reality, coffee shops replace meeting room rental for a lot of small business owners, and buying coffee is the "requirement" (in lieu of rental) for using the coffee shop. 

 

I'msorryIhaven'taclue raises some fair points.

 

Littleblackledger: I hope HMRC address this too - surely a de minimis level as allowable at least could make sense, to reflect the reality that homeworkers without office rental costs have replacement costs elsewhere

 

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By I'msorryIhaven'taclue
29th Jan 2014 10:53

How About...?

http://www.legislation.gov.uk/uksi/2009/730/article/3/made?view=plain

 

The Enactment of Extra-Statutory Concessions Order 2009

Subsistence expenses

3.  (1)  In the Income Tax (Trading and Other Income) Act 2005(1), after section 57 insert—
“Subsistence expenses
57A    Expenses incurred by traders on food and drink

(1) In calculating the profits of a trade, a deduction is allowed for any reasonable expenses incurred on food or drink for consumption by the trader at a place to which the trader travels in the course of carrying on the trade, or while travelling to a place in the course of carrying on the trade, if conditions A and B are met.

(2) Condition A is met if—

(a)a deduction is allowed for the expenses incurred by the trader in travelling to the place, or

(b)where the expenses of travelling to the place are not incurred by the trader, a deduction would be allowed for them if they were.

(3) Condition B is met if—

(a)at the time the expenses are incurred on the food or drink, the trade is by its nature itinerant, or

(b)the trader does not travel to the place more than occasionally in the course of carrying on the trade and either—

(i)the travel in connection with which the expenses are incurred on the food or drink is undertaken otherwise than as part of the trader’s normal pattern of travel in the course of carrying on the trade, or

(ii)the trader does not have such a normal pattern of travel.”.

(2) The amendment made by this article has effect for the tax year 2009-10 and subsequent tax years.

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By I'msorryIhaven'taclue
29th Jan 2014 11:48

Applying Those Rules....

So let's have a bash at applying the above legislation to your self-employed client's coffees, littleblackledger:

Preamble: you've already stated your client's base of operations is his home address.

(1) & (2) If the travel expenditure is allowable (or, where your client elects to walk rather than catch a cab, would have been allowable), then the associated food and drink expenditure is also allowable PROVIDED

(3) the trader does not travel to the place more than occasionally in the course of carrying on the trade AND the coffee shop is not part of any normal pattern of travel he might have.

I guess (3) is the key (and rather) subjective area upon which you must use your judgement: how frequent are his trips to any one particular coffee shop? And what on earth does "occasionally" mean (daily, weekly, monthly?).

Obiter: it seems your client would be safer varying his venues. If all £4k was spent in one shop, that might well constitute regular (as opposed to "occasional") travel to that particular venue (and so, potentially, disallowable); at the other extreme, one supposes that had he spent £4 at 1,000 different coffee shops his trips would most certainly be deemed occasional (and thus allowable). It follows, I suppose, that some of your client's £4,000 coffee bill might be allowable, because it was taken at "occasional" venues; and some not, due to frequent attendance at a particular venue.

Incidentally, note it is not only beverages but also food that is potentially allowable or disallowable. The two go together - so if you allow your client's coffees then you should also allow his sticky buns.

Of course, all the above relates to expenditure your client makes on himself, and not for any coffees or snacks he happens to buy for his prospects. Those would I suppose need to be weeded out as client entertainment.

 

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By adam.arca
29th Jan 2014 13:28

Irony?

Am I alone in sensing that tongue may well have been firmly in cheek with the repeated linking of Starbucks and "refreshing"?

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By Mark Three
29th Jan 2014 13:35

sticky buns!

My goodness, what with all the hullabaloo about the national obesity crisis, sticky buns should never be allowable.

 

oh, just noticed it's lunchtime and my staff could do with an afternoon pick me up - I shall go and get some..

 

 

...sticky buns.

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By trecar
29th Jan 2014 13:58

Entertainment seems a clumsy description

Personally I have always wondered what was so entertaining about a cup of tea or coffee. It doesn't raise a laugh or send me swooning over its artistic value. So why not use the correct term of hospitality. And why stop at Starbucks or whoever. If you offer a cup of coffee to a client whilst in your office the connotation of bribery still exists.

I was brought up to believe that to offer refreshments was a mark of manners. To now understand that I may be guilty of an offence under the Bribery Act unless I charge for it means my early training was horribly misguided. Does this mean that Parliament is now full of ill mannered louts who are incapable of understanding a simple act of kindness does not have to mask evil intentions? As so often, nowadays, proportionality has gone on vacation.

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By security2
29th Jan 2014 16:57

Some lateral thinking required here

Coffee shops should start charging £2 for "meeting space rental".  Oh, and by the way, their receipt entitles them to a free latte or whatever is their tipple in a place like that.  That way, the receipt is allowable under current rules!

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Replying to Paul D Utherone:
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By I'msorryIhaven'taclue
30th Jan 2014 10:45

From the Subliminal to the Ridiculous

adam.arca wrote:

Am I alone in sensing that tongue may well have been firmly in cheek with the repeated linking of Starbucks and "refreshing"?

I was attempting to influence the OP into regarding a coffee and its sticky accompaniments as "refreshment", in an effort to steer him away from the black and white thinking of "subsistence" or "client entertainment". Two spoonfuls of lateral thinking, please! Like Trecar, I prefer to think of those as "refreshment" and (until such time as someone invents a singing dancing bun) "hospitality". 

 

security2 wrote:

Coffee shops should start charging £2 for "meeting space rental".  Oh, and by the way, their receipt entitles them to a free latte or whatever is their tipple in a place like that.  That way, the receipt is allowable under current rules!

It's always struck me that coffee shops, and for that matter pubs and restaurants, might attract a lot more businesspeople if they were to give some thought to how they issue receipts. For example, if I go to meet a (UK) client and buy myself a coffee or a lunch that is tax allowable and the client too buys himself a coffee or a lunch that is tax allowable then our going "Dutch" is tax efficient. Where it falls down is when we buy each other coffee or lunch, whereupon at least one half of the bill becomes "entertainment". What's needed is a receipting system that issues a receipt to each of us: so that if I buy the first round of coffees and the client buys the second then we each walk away with receipts for the two coffees consumed by each of us (so 100% subsistence in each of our hands) rather than each walk away with a receipt for two coffees where only one coffee is "subsistence" and the other coffee is "entertainment". Anyone care to figure how that could work with lunches? (Aside from the obvious "go Dutch").

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By security2
29th Jan 2014 17:00

More on lateral thinking...

Small independent coffee shops would be able to create such receipts and then start to be frequented by small business owners up and down the land.  Take business off the non-tax paying global coffee giants.  That should also please HMRC!  Anyone advising/auditing coffee shops should recommend they do this ASAP!

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By MDK45
29th Jan 2014 18:28

Its all gone crazy. Years ago, 'commission' paid to middle men to arrange arms deals was allowable (yes, I worked in the shady 'defence' sector) and now buying a coffee for a potential client raises questions, ridiculous....

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Replying to Ruddles:
By cfield
30th Jan 2014 01:06

Try Waitrose!

Did you know that Waitrose loyalty card holders are entitled to free coffee from the machine in the corner? You just hand the empty cup in at the checkout and they knock it off your bill. My wife and I frequently enjoy a free latte when we do our Saturday shopping.

Forget Starbucks, Costa and all the others. Take your clients to Waitrose and treat them to a free latte. Then you don't have to worry about disallowable entertaining - sorry hospitality!

 

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By security2
30th Jan 2014 09:19

Ziferblat

I remember reading about this place, in London.  The idea might just catch on...

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By ds
30th Jan 2014 11:48

This modern world is so confusing.

I always thought the term "entertainment" when used in this context referred to certain types of nocturnal hospitaility by skilled ladies offering massage services and the like of which HMRC didn't approve. I never thought it referred to taking the client to an Andrew Lloyd Weber west end musical show for example. Maybe the modern politically correct term "grooming" could also be included, although I thought that was something you did to dogs and horses. Maybe I should stop there....

 

As for the American coffee chains mentioned, I wouldn't use them as I seem to pay more corportation tax than they do combined.

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By AnnieBB
30th Jan 2014 13:36

Meets vs entertainment

My personal view is that providing a coffee during a meeting is not entertaining a client, we are having a meeting.  Providing coffee is part of the meeting expenses.  Same as if I was to organise a breakfast or lunchtime meeting and provide a few snacks because of the time of day. These are meeting expenses, not entertainment.  I would not expect people to bring a pack lunch and thermos flask to a meeting.

Entertaining a client to me means things like taking them for a day out at the races as a treat, which would certainly not count as a meeting.

Staff entertainment can be the works xmas party.  But if we've had an emergency at work and they are suddenly expected to work late then ordering a couple of pizzas to keep us going would be a valid work expense, not part of staff entertainment.

 

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By sammerchant
31st Jan 2014 10:48

Entertaining or subsistence when client provides ?

What if the meeting is at the client's premises and he/she provides the coffee? How would you then treat the expense? Say the client is next door to a coffee shop and sends out for the two coffees?

I have often met a client halfway, if the distance between his offices and mine is too great; it seems fairer. I think we take it in turns to pay for the coffee and on the odd occasion, if the meeting goes on a while, for a sandwich or similar. 

I do not believe that one or two meetings at the venue constitute a more than "occasional" journey and certainly do not form "a normal pattern of travel."

Any comments?

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Replying to MikeyG:
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By I'msorryIhaven'taclue
31st Jan 2014 14:49

I Recommend the Self-service here...

sammerchant wrote:

What if the meeting is at the client's premises and he/she provides the coffee? How would you then treat the expense? Say the client is next door to a coffee shop and sends out for the two coffees?

I have often met a client halfway, if the distance between his offices and mine is too great; it seems fairer. I think we take it in turns to pay for the coffee and on the odd occasion, if the meeting goes on a while, for a sandwich or similar. 

I do not believe that one or two meetings at the venue constitute a more than "occasional" journey and certainly do not form "a normal pattern of travel."

Any comments?

I have a comment.

You should go Dutch and each buy your own coffees and sandwiches; then you would each walk away with a receipt for your own subsistence.

Taking it in turns to buy a round means you walk away with a receipt for a mix of your own subsistence (egg mayo) and client entertaining (best salmon). Your client also walks away with the same part allowable / part disallowable receipt if and when he ever takes a turn to pay.

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Replying to Tax Dragon:
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By sammerchant
01st Feb 2014 10:35

What about in-house coffees?

If you rent a meeting room at a five-star hotel, and if that has a kettle and all the makings for a cup of coffee or tea, would you discount the 'cost' of the drinks (and perhaps the odd biscuit) or would you treat all of the cost as an allowable expense? I think a certain amount of level-headedness is necessary.

I fail to see the difference between an in-house cup of coffee offered to/by a client and one paid for by the accountant or client. We are not talking about an expense exceeding about £5. Having said that, I remember attending a presentation on RTI at HMRC Euston where there was no drink offered, not even water from a dispenser. Perhaps you should carry a thermos flask and find a convenient park bench for the chat with your client.

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By taxhound
31st Jan 2014 18:49

There is a firm out there

Which manages to schmoozie up to HMRC and persuade them that his clients should be allowed part of their entertaining costs as it is more akin to marketing than entertaining.  He nicked a client from me after I explained to the client until I was blue in the face that legislation does not allow a deduction for entertaining but this guy managed to get him a % allowed on an ongoing basis.

Well, great for his clients, but personally I find this leaving a very bad taste in my mouth as it says in the legislation entertaining is not allowable.  It should be one rule for all.  If it is negotiable then we should all be aware of this and able to proceed on this basis, but I think this was a case of knowing people in the right places, which stinks as far as I am concerned.

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By ds
01st Feb 2014 12:54

It's quite simple really..

A cup of coffee or two and even a sticky bun is not entertaining, it's purely hospitaility.

Paying for the client to visit South American coffee plantations and see how the coffee is made would be entertaining and so not allowable. I think the OP should allow the cost of coffees as allowable expenses so long as it was a legitimate business meeting and receipts are provided.

I wonder if as part of working at HMRC free tea and coffee is provided or at least fresh boiling water in order to make your own brew? If so technically this would be a benefit in kind but it is hardly going to cover the public deficit by collecting it as a tax. Then there are the benefits in kind received by Members of the Houses of Commons and Lords. Are their benefits fully documented and allowable?

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By BKD
01st Feb 2014 13:02

Watch your wording

A cup of coffee or two and even a sticky bun is not entertaining, it's purely hospitaility.

That is contradictory, because:

"entertainment”  includes hospitality of any kind"

(ITTOIA 2005 s45(4)(b))

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By sammerchant
01st Feb 2014 14:02

Following on from the above, I wonder if all of the 'hospitality' offered to David Hartnett was disallowed for tax purposes? See http://www.theguardian.com/business/2010/jun/17/hmrc-head-tax-corporate-... perhaps this was not considered significant and simply ignored.

 Mind you, he's far from being the only one see http://www.theguardian.com/news/datablog/2010/jun/17/civil-servants-hosp...

 

 

 

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