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Fraudulently prepared accounts - how far back can we go?

Difficult one this (at least for me it is!).

Employee has been stealing from client (one man band sole trader) for a number of years.  In order to get away with it for so long, payments to herself or other people on her behalf were disguised as PAYE/VAT payments on the SAGE system and also disguised on the bank statements.  PAYE/VAT was not being paid to HMRC but when HMRC debt collection services called, they rarely got past the employee, so this was able to continue for a few years.

The employee not only did the book-keeping but also did the year end accounts so there was no third party firm of accountants to pick up on any wrongdoing.

My question is this.  How far back will HMRC allow taxpayers to go back and resubmit accounts that were in effect false.  Client has HMRC threatening bankruptcy due to the unpaid PAYE/VAT going back 7 years  but doesnt have the funds. One way of getting the funds is to redo accounts for x number of years which will alter the amount of tax paid thus creating a tax repayment which can be used to reduce some of the PAYE & VAT. The question is, just how far back?

Another problem we are up against is HMRC are being awkward about supplying us with payments they have received.  They sent back a letter along the lines of "all businesses are responsible for keeping their own records of PAYE.....blah blah" which is true, but the owner has been too trusting and allowed the employee to commit theft/fraud and it would be so much easier to have an official list of PAYE payments made to save us the hassle and cost of contacting the bank and asking for a breakdown of every single cheque and BACS payment for 7 years.

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28th Feb 2012 16:24

Can the profits absorb the hit in one year?

If so can you not do that as an adjustment?

 

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28th Feb 2012 16:36

The losses from the theft are around 5 times the yearly profit. 

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28th Feb 2012 16:47

I assume the police are involved and he has sued the employee following up with bankruptcy if she doesn't pay up

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28th Feb 2012 17:03

Data Protection Act

Have you considered the client making a subject access request under s7 Data Protection Act 1998?

HMRC may respond that s7 is disapplied by s29(1) of the Act but your response would be that the disclosure would not prejudice the assessment or collection of tax and so s29(1) does not, in this instance, disapply s7.  So hopefully you would get the info (for a fee of £10).

Worth a try at any rate I would suggest.

Of course you need to have reported the suspected crime to your MLRO / SOCA under s330 PoCA 2002 / MLR 2007.  (If you need to know, it sounds like both theft contrary to s1 Theft Act 1968 and false accounting contrary to s17 of the same Act.  There may also be some fraud by false representation and fraud by abuse of position contrary to ss1, 2 & 4 Fraud Act 2006.  In consequence of that the employee has acquired or used criminal property contrary to s329 PoCA 2002, which is a reportable money laundering offence.)

Presumably you are hoping to get the losses due to theft allowed as expenses reducing the profits for income tax purposes thereby creating an income tax refund to set against the unpaid PAYE & VAT.

Do also bear in mind that the client may be able to sue the former employee in the civil courts (although the cost may exceed the likely recovery) and can (and should) ask the police to seek a compensation order in the client's favour if and when the former employee is convicted of the thefts (under s130 Powers of Criminal Courts (Sentencing) Act 2000).

As for the answer to your actual question (how far back can you go) - sorry, I don't know.

David

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28th Feb 2012 16:58

@bernard

 

Employee is now serving a number of years at her majestys pleasure. Sadly not a penny to the employees name so these debts have to be paid by client.  

 

@davidwinch

Have just got off the phone to HMRC and they have said payment schedule is in the post! 

Report was made to SOCA around the time of the police investigation.Client filled a compensation order in from the police but as stated above, employee has no money. All proceeds went on gambling.

We are hoping that we can get the losses due to theft allowed as expenses, as employee was  convicted I'm not sure they can challenge it can they?

 

Thank you all for your replies.

 

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28th Feb 2012 17:09

Presumably no insurance?

Presumably the client did not have any insurance cover against theft by staff.

I think the only grounds on which HMRC could refuse relief were if the thief was a partner or senior employee in the business (which seems unlikely) or if the claim for relief is out of time (which is the question you began with).

When did the losses stop (and when is the accounting year end)?

David

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28th Feb 2012 17:30

Insurers refusing to payout as a condition of the policy was the books and records must be checked by more than one person. 

How would HMRC define a "senior employee"?

The year end is 31 August.  I would guess the losses would eat into the profits all the way back to August 2007

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28th Feb 2012 18:16

Senior employee

This guy was a sole trader.  I think a senior employee relates more to an incorporated business where it would refer to a director or senior manager who is also a shareholder, so that the theft is akin to a distribution of profit.  I don't think your guy was a senior employee in that sense.

In the original post you said PAYE / VAT was outstanding for 7 years.  I was thinking that all of this old stuff was shown as paid per the SAGE accounting records and hence the thefts would have started about 7 years prior to their discovery.

Ordinarily a claim for overpayment relief should be made within 4 years of the end of the relevant tax year.  So a claim for 2007/08 can be made up to 5 April 2012.  See SACM 12005.

It would ordinarily now be too late to make a claim for 2006/07 and any earlier years, but if appropriate you could apply to have a late claim allowed on the ground that the information has only recently come to light due to no fault of the taxpayer.  See SACM 10035.  When were the thefts discovered?

By the way, do you know how much the employee stole and what sentence he got?  Did he plead guilty?

David

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