Everyone makes assumptions, and mostly, if proven wrong, they do no harm. But there are areas and occasions such as in finance and taxation where making assumptions can be dangerous and very painful.

• If I do not take a tax deduction for private expenses in the company I am not taxed personally.

Where a company incurs expenditure on behalf of a director that was not incurred ‘wholly and exclusively’ for the purposes of the business, this gives rise to a benefit in kind if the amounts are not reimbursed to the company. This is irrespective of whether or not the company takes a tax deduction.

• If I pay a self-employed person it is not my concern if they pay tax.

If you engage a person to do work for you, it is important that you ensure that you do not have an employer/employee relationship.

If you do have an employer/employee relationship you have an obligation to deduct income tax and national insurance via the PAYE system. You are deemed to have made a net payment and could find yourself out of pocket for the tax and national insurance.

HMRC would consider various factors including who supplies the equipment, whether the individual is able to hire other people to do the work, who is financially responsible if the work is not undertaken correctly, etc.

• If I put money in my child’s name they can utilise personal allowances and lower rate tax bands.

Where parents transfer funds to children, the interest arising is taxed on the parents if the interest is more than £100. However, capital gains made by the children will be wholly taxable on them, subject to their Annual Exemption (£8,800 for 2006/07).

• If I have not received a tax return I am not obliged to complete one.

It is the taxpayer’s responsibility to inform HMRC of their need to complete a tax return. An individual would need to complete a return if they are a higher rate taxpayer, receive any gross income in excess of their personal allowance, if they carry out a trade or let a property, or if they make any significant capital gains.

For individuals who have not received a tax return they must notify HMRC of anything that affects their chargeability to tax by October 5 following the tax year. Failure to do so will result in a maximum penalty equal to the tax unpaid as at January 31 following the tax year and interest.

• If I give shares to my employee there are no tax consequences.

The gift of shares to an employee triggers a number of tax charges. The employee is subject to income tax and possibly national insurance on an amount equal to the market value of the shares on the date of the gift (less any consideration paid by the employee).

The donor triggers a capital gain, the gift being treated as a deemed sale at market value. Professional tax advice should be taken before transferring any shares to an employee as there are some extremely tax efficient methods if the right planning is carried out.

• I can liquidate my company after two years and extract the cash and only pay 10 per cent tax. I can then start up in a new company.

Since the introduction of taper relief, individuals have tried to avail of the valuable relief by liquidating companies, extracting the cash and starting again.

Where there are phoenix company arrangements, HMRC can apply some specific anti-avoidance legislation which will tax the proceeds on liquidation as dividend income.

In such cases, instead of a 10 per cent tax rate there could be a charge of 25 per cent of the amount received.

Paula Tallon is a director and head of direct tax at Chiltern plc