It transpires that a client has been lending money without a licence, for about six years. We knew nothing about this, and since it was apparently in cash and it seems every penny was reinvested rather than spent, there was effectively nothing to pick up on. It started very small and grew.
The situation has come to light after a Customs raid on a completely different matter (!) that turned up the loan books.
A court case is in the process, but we are wondering about the tax consequences.
We are told that the loan business was profitable whilst being carried out, with the loan balances quadrupling in the six years of trading (so around 400% return over six years). However now that the whole matter is out in the open the authorites have told him that as he does not have a licence, will not get a licence, and hasn't the correct loan documentation in place, he is not allowed to try and collect his debts, so virtually everything is lost (profits and initial capital).
HMRC are not aware of any of this yet, or if they are they haven't said anything. There's little doubt that they will become aware we think.
So what plan of action is suggested, and what is the tax situation?
Our understanding is that profits from a trade are taxable, regardless of whether legal or illegal. So what about the loss at the end - is this allowable for tax also?
What's the best way to come clean to HMRC in advance?