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ACCA Applied Knowledge · Business and Technology · Regulation and financial crime

A company director instructs the finance team to leave out cash sales of $40,000 from the accounting records so that taxable profit is lower. How should this be classified?

This is tax evasion. Deliberately leaving cash sales out of the accounting records to lower taxable profit is concealment of income and is illegal. Avoidance would require lawful arrangements, and the small size of the amount or the director's instruction does not make the omission legitimate.

  1. ATax avoidance, because the company is reducing its tax bill
  2. BTax planning, because it is on the director's instructions
  3. CTax evasion, because income is deliberately concealedCorrect
  4. DTax mitigation, because the amount is small

Explanation

Deliberately omitting known income from the records to reduce tax is dishonest concealment, which is tax evasion. Reducing the bill is not enough to make it avoidance; avoidance must be lawful. The amount does not change the classification.

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