Chartered Management Accountant
Midas Accountancy
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Dodgy Dealings

My client runs a small limited company based in offices with a couple of employees. They do have one client in Europe that I am aware of. However, when going through the Subsistence nominal account for their latest accounts there are a large number of cash withdrawals and payments for petrol and meals made overseas. I happen to know that the director of the company has family in Africa and quite often will go out their for months at a time.

On raising the matter to him and tentatively suggesting that many of these withdrawals from the business account should be posted to the directors loan account rather than an expense account my client insisted that these were bona fide business travel expenses. I had also asked that receipts and invoices for these expenses were provided for me to review if he felt these were valid business travel expenses. Unfortunately, as my client informs me, his car was broken into and his laptop along with all of the relevant paperwork was taken by the thief.

Hmmmnnnnn
Any suggestions for the best course of action here? I would estimate that the expenses are in the region of £2-3000 for the year.

Many Thanks in advance for your advice.

SD

Replies

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21st Feb 2013 14:23

I hate it when clients try to deceive me

If you ask them outright, and they say business, what can we do? I get quite worried if I think a client is lying to me, and it also annoys me that they think I am so gullible, or stupid, or willing to turn a blind eye.

I read them the riot act and explain the seriousness of claiming personal expenses as business. However, we cannot make them listen, or heed our advice. If my suspicions continue I tend just to sack them and get rid of the problem.

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21st Feb 2013 15:31

Who accounts are they?

I come back to the basic point that they are the client's accounts not yours.  If the client says they are business expenses then they are business expenses and are put into the accounts and where appropriate a deduction for CT is made.

A separate issue is the advice that you give the client as to what the potential issues are in relation to including business expenses in the accounts and CT return that cannot be justified or supported.

I try to scare those that I think are including expenses that cannot be supported; something along the line of 100% fines plus the tax and if I really get going the world jail.  I then ask them if the tax saving is really worth it.  After this conversation they usually agree a compromise.  The conversation is noted.

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21st Feb 2013 15:50

What do you know about the client?

Assuming that there is some travel involved in servicing the European client, £2/3k does not seem entirely unreasonable. Assuming 4 trips a year, then this is only £750 per time which if including flight, accomodation etc does not seem paricularly hard to believe.

I assume you have tried reviewing the sales invoices for expenses re-charged?

Basically, does the client's business actually involve foreign travel? It's also not impossible that the European client has a site in Africa (it's a big place).

 

 

 

  

 

 

 

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21st Feb 2013 15:50

Just to add

Money Laundering Report.

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By redman7
21st Feb 2013 15:56

Letter of Rep

the numbers don't seem that material but I'd get a decent letter of rep signed off with the accounts to cover you

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By Glennzy
21st Feb 2013 15:56

I agree with Peter

the accounts are prepared from the books and records and explanations provided to you from the client.

if you ask (and document that you have) him and that is his response then it will be him who will have the problem if HMRC ask about the costs.Travelling costs are a popular choice for an aspect inquiry, so make him aware he will need to justify the costs if questioned and the outcome he will face if he cannot.

Incidentally do these African trips result in a new supplier for the company, or any overseas sales for them.

Its amazing how many thieves break in and steal invoices, bank statements, VAT records and Simplex D cash books. There must be a black market for them.

 

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Sorry, I don't buy that approach.

No I don't check every receipt but unless there are exceptional circumstances for such a 'loss or records' then it goes down as personal or the client looks for another accountant. My reputation is far more important than any one client.

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Devil's Advocate
Thanks for all the advice so far.

Just to play devil's advocate for a moment, if a client had lost records (for example in the post to the bookkeeper) is there anything they can do to try and substantiate the costs that they have incurred? What would HMRC expect to see in this case if an investigation were launched.

I don't come across this kind of scenario very often as I tend to deal with very small businesses and most of them, when questioned about potentially personal expenses, will put their hands up straight away and agree for them to be posted to the directors loan account.

I have created a report of the suspect expenses in the travel and subsistence category which I intend to send to the director. I was going to ask him to review and substantiate each claim with a comment regarding why the expense was incurred and to reference a sales invoice where it has been recharged to a client. A lot of the expenses were incurred on the company credit card and it is very suspicious that he managed to confirm they were all business related before I had even provided the breakdown. Usually I would anticipate one or two personal expenses to sneak through at the very least. Is this enough to trigger an ML Regs Report?

Many Thanks Again!

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By ACDWebb
27th Feb 2013 12:53

How about

Sir Digby Chicken Caesar wrote:
Thanks for all the advice so far. Just to play devil's advocate for a moment, if a client had lost records (for example in the post to the bookkeeper) is there anything they can do to try and substantiate the costs that they have incurred? What would HMRC expect to see in this case if an investigation were launched. I don't come across this kind of scenario very often as I tend to deal with very small businesses and most of them, when questioned about potentially personal expenses, will put their hands up straight away and agree for them to be posted to the directors loan account. I have created a report of the suspect expenses in the travel and subsistence category which I intend to send to the director. I was going to ask him to review and substantiate each claim with a comment regarding why the expense was incurred and to reference a sales invoice where it has been recharged to a client. A lot of the expenses were incurred on the company credit card and it is very suspicious that he managed to confirm they were all business related before I had even provided the breakdown. Usually I would anticipate one or two personal expenses to sneak through at the very least. Is this enough to trigger an ML Regs Report? Many Thanks Again!
Diary entries for the meetings with clients overseas, and dare I say NOT a load of Facebook photos / entries of the wondeful break they had staying with friends aroud the relevant times. I am sure this is likely to become a wonderful source for anyone from HMRC with the will to do even the slightest internet search.
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27th Feb 2013 13:06

That's a thought....

ACDWebb wrote:

Sir Digby Chicken Caesar wrote:
Thanks for all the advice so far. Just to play devil's advocate for a moment, if a client had lost records (for example in the post to the bookkeeper) is there anything they can do to try and substantiate the costs that they have incurred? What would HMRC expect to see in this case if an investigation were launched. I don't come across this kind of scenario very often as I tend to deal with very small businesses and most of them, when questioned about potentially personal expenses, will put their hands up straight away and agree for them to be posted to the directors loan account. I have created a report of the suspect expenses in the travel and subsistence category which I intend to send to the director. I was going to ask him to review and substantiate each claim with a comment regarding why the expense was incurred and to reference a sales invoice where it has been recharged to a client. A lot of the expenses were incurred on the company credit card and it is very suspicious that he managed to confirm they were all business related before I had even provided the breakdown. Usually I would anticipate one or two personal expenses to sneak through at the very least. Is this enough to trigger an ML Regs Report? Many Thanks Again!
Diary entries for the meetings with clients overseas, and dare I say NOT a load of Facebook photos / entries of the wondeful break they had staying with friends aroud the relevant times. I am sure this is likely to become a wonderful source for anyone from HMRC with the will to do even the slightest internet search.

Perhaps a good idea to tell your clients that if they receive a Facebook friend request from HMRC to click <decline>.

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By ACDWebb
27th Feb 2013 17:04

Or at least

Catherine123456 wrote:

ACDWebb wrote:

Sir Digby Chicken Caesar wrote:
Thanks for all the advice so far. ...
Diary entries for the meetings with clients overseas, and dare I say NOT a load of Facebook photos / entries of the wondeful break they had staying with friends aroud the relevant times. I am sure this is likely to become a wonderful source for anyone from HMRC with the will to do even the slightest internet search.

Perhaps a good idea to tell your clients that if they receive a Facebook friend request from HMRC to click <decline>.

Or at least check their privacy settings. So many people leave their account wide open to the world. How many employees have been hoist by their own phoning in on a sickie only to have the boss/HR have a quick look at their "Oh my head. Wot a night" status?
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By cfield
27th Feb 2013 12:48

Best way forward

As others have said, getting the client to sign a Management Letter is essential. It often concentrates their minds wonderfully to boldly state on an official letter what they previously just claimed verbally.

Also, has he furnished proper expense claims? If not, make some up for him with all the costs he's claiming. Include a box for him to tick if the receipts were lost, stolen or simply not obtained. Have a statement at the bottom stating that all expenses were incurred wholly, exclusively and necessarily for the job. Then get him to sign (with todays date).

If there is any business reason at all for the visits, then the flights and hotels should be OK provided that was the principal reason for the trip. However, this would be difficult to prove if he was there for months on end visiting his family too.

Tell him he would need to produce a list of business meetings (including the reasons for them) if the taxman ever enquired into them. It might make him think twice about claiming the whole lot.

Also, try to work out a reasonable daily rate for food, taxis, etc. If the cash drawings and credit card items exceed this, suggest the excess goes to his loan account.

Try to emphasise you are doing your best to protect him from the big bad taxman in difficult circumstances. Hopefully he will then see it as a useful investment of his time (and yours) rather than a typical accountant being over-fussy.

Going forward, try to get him to a) keep receipts, b) keep a log of his time on long business trips, and c) keep a running balance of his cash expenses. You could give him an app for his smartphone to do this on, or even just a plain old spreadsheet.

But it's usually just wishful thinking expecting clients to do this. It's even worse than trying to get van drivers to keep mileage records. All you can do realistically is make the best of a bad job.

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27th Feb 2013 13:02

An old cartoon

 

Almost three decades ago when I was one of HM Inspector of Taxes I had a copy of a cartoon on the notice board in my office. The cartoon showed an inspector of taxes visiting a business owner at the business premises. The business owner was standing in front of a filing cabinet holding a fire extinguisher. One drawer of the filing cabinet was open with wisps of smoke coming out of the drawer. The caption to the cartoon was the owner saying to the inspector:  

 

"It was a nasty blaze but I managed to confine it to the business records"  

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By Glennzy
27th Feb 2013 13:23

Ebay Is a source used by HMRC

at a recent meeting with a tax inspector they had asked my client to reel off every car he had owned in the last 10 years which he did. They then asked if he was sure that was all he has owned,  which he confirmed. They then produced an Ebay advert of an expensive car he had sold recently and which was "missing" from the list.

His Ebay account wasnt easily associated with his name but it just goes to show the level in intelligence that is readily available these days, so boasting about your new boat in Spain on Facebook may not be the best way forward.

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27th Feb 2013 15:59

in real life

The client is signing the accounts.

the CT return is a statutory declaration, providing you have clearly advised the client of possible difficulties (and recorded your advice) and he still signs, it is his problem.

But you have credit card statements, and the amount is not significant for four overseas trips

Really it is horses for courses. I would have no difficulty in justifying £2k or £3k for four such journeys.(£20k or £30k is not so easy) Especially if the client can produce details of customers or prospects in those places.

Remember the old adage "The accountant is not expected to be a detective". That is Audit law.

If this is not an audit, let common-sense prevail

There are many Appeal / Tribunal cases regarding probability of expenses, especially car expenses, where exact voucher verification was not available. Read up on some of them- and live in peace.

 

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By cfield
27th Feb 2013 16:46

Accountant Dogs

David Gordon FCCA wrote:

Remember the old adage "The accountant is not expected to be a detective". That is Audit law.

I think the phrase you're looking for is "an auditor is a watchdog not a bloodhound".

Apparently this was first quoted by Lord Justice Lopes in the Kingston Cotton Mills case in 1896.

Where's Tax Hound? Perhaps he can settle it.

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27th Feb 2013 16:56

More like a Golden Retriever

Given the recent (and not so recent) high profile failures in the audit profession.

 

 

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27th Feb 2013 17:09

given the amounts involved

are relatively low and it might be possible to justify that there are some unreceipted expenses, I would ask the client to confirm, in a seperate letter not just a management letter, that the £2,000 drawn in cash whilst away on business related to expenses as follows : £500 entertaining, £300 taxis, £250 travel, £100 subsistence - and so on. That way he will be giving you a more detailed breakdown of the expenses and AS LONG AS you feel that he has not been bare faced lyingto you accept his representations.

 

If you think he has been lying to you over this, what else has been omitted ? Cash sales ..... If that is the case I would state that you are not prepared to act for him.   

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By paddy55
27th Feb 2013 22:43

Travel expenses

If you are aware beyond a reasonable doubt that your client's claim is false, then you cannot file his Tax Return. Otherwise, you will be complicit in the crime.

However, if you believe on a balance of probabilites that the claim is false, then I think you could file the Return on his behalf. It would be prudent to warn him of the risks first.

However, in such cases, many accountants would prefer to terminate their association with the client.

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27th Feb 2013 23:02

LIving in the real world

paddy55 wrote:

However, in such cases, many accountants would prefer to terminate their association with the client.

 

 

On that basis I'm amazed any plumbers, bricklayers, joiners, or electricians can find an accountant.

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28th Feb 2013 09:32

If his laptop was taken as well then I presume that there in an insurance claim to for repair of damage to car and loss of laptop and even a police incident number or otehr evidence it has been reported. If that is the case then you both have something to back up story for any future HMRC enquiry.  Another thing is to ask him to try to analyse the various components of the expenditure: cost of flights etc. If he can't do any of these things then the chances are that he is not being honest with you and you will have to decide where you go as far as keeping him as a client.

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10th Mar 2013 13:23

Advice needed

Hi, I have a new client who is in marketing. However, he claims that his other business activity is filming and he is claiming loads of expenses for filming, that look like personal to me. All the clothing he buys is "film Costume", the food is "film set" etc. He says that he uses his home for filming and want to claim use of home for that. He also "buys" a lot of second hand equipment with no receipts for it /camera for 4000 paid cash/. There is no income at all from filming.

What shall I do? Just disengage him?

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