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Auditor's liability for not registering for VAT ??

A charity has been operating for 30 years. The trustees believed that as a charity it did not need to charge VAT.

An internal review lead them to question this and they approached HMRC .

They have reviewed the correspondence and guidance received from HMRC and have now registered for VAT, on the advice of their current auditors, and have received a tax bill for £500k. This seriouly threatens the very existence of the charity. Will they have recourse against their former auditors who had never questioned or raised the need to register for VAT ??

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Not enough information

I don't think you will be able to provide enough information here to get a meaningful response as there could be many factors involved. I would imagine for one thing that the auditors obtained a management representation regarding this that you should look for (it will likely be on the letter of management representations funnily enough). 

VAT can be complicated and your auditor is not supposed to be a VAT expert. If they have noticed the possible VAT situation at all in their audit work (as your current one's seem to have) then they will probably have covered themselves by getting this representation from the management comittee. 

Is there no scope for recharging the backdated VAT to the customers? (They will often oblige although providing they are VAT registered themselves)

  

  

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More info

How far back does the 500k go?  Have the rules changed since the last auditors acted? Has the size or status of the charity changed in any way?  £500k VAT implies vatable supplies in excess of £3million which is a hell of a lot for a charity.

 

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Wow! £500K sounds like an awful lot, has the assessment itself been scrutinised?

As Welsh Dragon says we probably need a bit more clarity on dates and any major shifts in activity or relevant tax legislation during the period, but prima facie it would appear that the auditors work could have been deficient (unless of course they qualified audit opinions etc). Practice Note 11 Paras 43 through 49 are a useful starting point for assessing what might have been expected of the auditors, as is a review of the letter of engagement.

Without wishing to sound overly dramatic you may wish to advise the trustees (past & present) to seek legal advice on their own positions in the context of duties owed to the charity. Would be interested to hear other readers' views on that.

http://www.charity-commission.gov.uk/Publications/cc3.aspx#i3

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No time limit backwards...

No time limit, so it could be 10 years, maybe 20, maybe even 30 years so the £500k might not be as astonishing as it seems at first glance.  HMRC don't really care whether they bankrupt the charity; oddly enough, they don't care whether their action costs HMRC either.  I dealt with a similar case, with a non-profit-making company attached to a charity, where the answer was for them to invoice their customers for the output tax un-charged.  This, in turn, would allow significant unclaimed input tax to be claimed, and this undoubtedly cost HMRC an arm and a leg.  The most damning factor in all this was that on a VAT inspection to the associated charity shortly after the company started, the officer cast an eye over the non profit-making company and told them that the supplies were exempt.  But because it wasn't a formal clearance, no weight could be placed on that, as a reason to accept 'misdirection'.

As regards former auditors, I think "duty of care" would be relevant for something as basic as the VAT liability of the income.

 

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A supply or not - not easy to determine

For there to be an obligation to register for VAT there have to be supplies above the registration limit.

The key question - which is NOT easy to answer always - is "is the charity making a supply?".

As seems to be usual with VAT Tribunal cases there are decisions which seem to be contradictory.

If a Charity wishes to be seen to make supplies then HMRC will take a case to Tribunal to say that no supplies are being made.  This would apply where supplies are made to a local authority meaning an input tax recovery advantage gained by the Charity.

If a Charity wishes NOT to be seen to make supplies then HMRC will take a case to Tribunal to say that supplies ARE being made.  This would apply where the supplies are made to inidividuals or other bodies not able to recover VAT.  This might be the case that is the subject of this query.

Some Tribunal cases on this subject, which in my view have contradictory decisions include:-

Hillingdon Legal Resource Centre

Keeping Newcastle Warm

Wolverhampton Citizens Advice Bureau

The key question is not the facts of the case but how a Tribunal will be persuaded by HMRC to interpret the facts, especially when Grants are in question.    Also, it don't help if a Charity's advisors take HMRC's side / view on a matter that's not black and white but rather in a murky grey area.   In this latter circumstance the new advisors might have a case to answer against them from the Charity.

My point is that the Charity that allegedly is about to lose £500k in VAT liability has a case of uncertainty on the subject matter - arising from contradictory Tribunal decisions - which means that there was probably a tenable opinion from advisors that no VAT registration liability existed - and conversely a tenable opinion that VAT registration liability DID exist.   The firm of advisors who did not refer to the Tribunal cases that I've listed above (or other relevant ones) to support their opinion are the ones I suggest who are at fault and the point is it could be either the new advisors (for not strongly arguing the Charity's case - ignoring supportive Tribunal decisions) or the old advisors  (for not being aware of converse Tribunal decisions and risk arising).

Contradictory decisions from Tribunal also include buying an asset then renting it out.  If the asset is of a certain "frowned upon" type then there's no business  (as there's little risk if only one such asset bought) and no eligibility to register for VAT per a bizarre Tribunal decision, but if the asset was of a different category then no problem, even if only one asset of its different type bought.  Such is life with VAT.  At times nothing seems simple or straightforward and most certainly logic and fairness goes flying out of the window.   Hence uncertainty, hence the instant problem.  Hence difficult for advisor to agree, hence impossible for one advisor's advice to be 100% reliable - either way.

 

 

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come off it

Roland says

VAT can be complicated and your auditor is not supposed to be a VAT expert. If they have noticed the possible VAT situation at all in their audit work (as your current one's seem to have) then they will probably have covered themselves by getting this representation from the management comittee. 

not supposed to be an expert - sorry you cant get off the hook like that otherwise whats the point of having an audit - they will be sued if the facts are correct and their PII will have to pay

i am looking at a case where a  CA prepared accounts but did not check the VAT - all UK sales thro the internet were regarded as zero rated which of course they are not - but he put his name to the accounts - OK the vats only 25k but  its a lot for the small company - i have no intention of letting him wriggle out of his responsibility

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Missing the point

not supposed to be an expert - sorry you cant get off the hook like that otherwise whats the point of having an audit - they will be sued if the facts are correct and their PII will have to pay

You are fundamentally misunderstanding the audit process (as most people in fact do). The audit report is not a guarantee that there are no issues in the accounts, just that they are not materially mistated. If the previous auditors can demonstrate sufficient evidence on their file regarding VAT registration, then they will be "off the hook".

As I said before, (and is echoed by the other poster to an extent) VAT is complicated and something like this could easily fall within the realm of a specialist - the auditor cannot be expected to fullfill this function in every case. If the previous auditor questioned why there was no VAT registration in place and then supported this by obtaining a management representation saying something along the lines of "we believe that we are not required to be VAT registered based on our own investigations and professional advice obtained" then they may well have sufficently covered themselves. 

I do agree that this would seem to make audit's pretty meaningless but we have all known that for years (about 6 months after qualifying usually).

  

 

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well we will have to disagree

i was an FCA for 30 years before giving up

i was a registered auditor as well but gave that up ages ago as it was the worlds worst job - but fees come with obligations and knowing about VAT is surely a prime one for an authorised individual (what about CPD then)- if someone with the apparent qualifications did not establish the real vat position of the charirty i have absolutely no sympathy - what good is the audit process anyway if auditors flunk their responsibility by repeating mantra in their letters of representaion etc

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Do you honestly claim to be an expert in everything?

i was a registered auditor as well but gave that up ages ago as it was the worlds worst job - but fees come with obligations and knowing about VAT is surely a prime one for an authorised individual (what about CPD then)- if someone with the apparent qualifications did not establish the real vat position of the charirty i have absolutely no sympathy - what good is the audit process anyway if auditors flunk their responsibility by repeating mantra in their letters of representaion etc

I have accounting & tax qualifications but that does not make me a VAT expert. I am not an expert in many other fields either - employment law, international tax etc all of which could have material impacts on the financial statements but the point is I am not required to be.

In this case it is very likely not just a matter of saying turnover greater than £70k so registration required. Like I said, I am qualified & experienced with both VAT & charities, but I would still refer situations like this onto experts in most instances.

Of course, this could well be the problem. Perhaps the previous auditors were in over their heads for a job they lacked the experience for? We have no idea what work this auditor did (or perhaps more importantly didn't do) but as I say, a management representation may go a long way here especially if the auditor recommended getting professional advice in a management letter.  

As the other poster mentioned, perhaps they can demonstrate a different view point as to why they believe the charity shouldn't be registered?

We really don't know enough to comment.

But of course audits are pointless! They all are and always have been (and doubtless always will be).

 

 

 

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Puzzler

 Has there been any allowance made for Input Tax recovery i.e. is the £500k all Output Tax or has any Input Tax been netted of? Every little helps - also the VAT man is most likely going to agree if asked does my client owe VAT - £500k would suggest it's worth getting a second opinion from a VAT Expert specialising in Charities - lots in the Big 4 I hate to say and plenty in mid tiers.

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flabbergasted

you may know little about employment law etc - but VAT is different it is fundamental direct tax - if as an accountant you cant take a position on vat you should not be auditing comercial or charitable concerns - end of

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charity

I wonder what the assets are..is it worth liquidating it and statring again?

It seems to me that if this query is real and  if the numbers involved are this big, you should be talking to linklaters or slaughter and May not accounting web...

 

As a senior statutory auditor myself what do I think...plenty of times I have said to people...are you sure you dont have to be registed for vat??? and they say yes and I say why and they say because we dont and blah blah.

 

So I put it in the letter of comments...something like

 

As auditors we are not vat experts, we have relied on your assurance you have correctly treated all of your supplies for vat. If you have any doubt you must obtain specific advice.

 

There but for the grace of god....

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How many auditors?

On re-reading the OP, I see that he does in fact say that the issue of VAT registration had never been raised or discussed before.

But I assume the same firm did not audit for the past 30 years? Presuming that there was more than one over this period, it does seem odd that none of them mentioned it.

Although auditor thinking usually does involve a fair bit along the lines of "if they didn't question it last year, I have no reason to this year".

 

 

 

 

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tom

thats it exactly - there but for te grace of god go i - we all have made errors in the past im sure of that its a matter of degree, but i must take issue with your clause re vat , do you think that the admission of lack of knowledge  would be enough to absolve you in a similar case - i hold that knowing whether an entity should register or not for vat is a basic knowledge and should be withing every accountants remit - i agree  that some of the more esoteric realms of vat are horrendously complicated , but registration.............

and one other comment dont go to a large firm of solicitors magic circle or otherwise at the moment go to a specialist vat consultancy first

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Get specialist advice

My advice would always be to use a charity VAT specialist - charity VAT law is far too complicated for an auditor. We use Baker Tilly in Leeds for all our charitable VAT affairs and they have been absolutely invaluable

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