Mojo1999
Blogger
Share this content
0
82
10120

Is an accountant liable for not incorporating my business?

Is an accountant liable for not incorporating...

Hi, I asked my previous accountant 3 times whether i should be a sole trader or a limited company. The first time when i set up my business in July (by this time my PAYE from my previous job for the tax year in question was already close to the 40% tax bracket). The 3rd/last time I asked (a few months later in the same tax year) was when my total earnings for the tax year had reached 6 figures. My business, costs and trading were fully known by my accountant and they had committed in writing to making my income tax as efficient as possible. I was finally incorporated in late January of the last tax year - 6 months after setting up my business and after generating a 6 figure total income for the tax year to that date.

This is not a 'kick the accountant' question. More a genuine desire to know whether the accountant (by not providing any information on the risks/benefits of sole trader versus limited company status when asked 3 times which was the most efficient status - and by stating in writing that they were on top of my accounts and would make my accounts tax-efficient) was potentially negligent in their advice and action? The accountant had committed in writing to taking care of all communication and interaction with HMRC and had stated in writing that they would minimise my income tax. I changed accountants last year as I felt I could not get proper answers.

My new accountant has just completed my sole trader accounts and self assessment and, as a consultant with relatively low costs, I now have notable excess profit liable to tax at 40%

My new accountant has stated that a limited company would have been far more beneficial to me tax-wise and that the decision not to incorporate will result in tens of thousands of pounds additional tax payment.

Am i being unreasonable in expecting to have a case to seek some form of financial redress? Or is it simply a case of you win some, you lose some when it comes to accounting advice? Note my accountant is ACCA accredited.

Replies

Please login or register to join the discussion.

24th Jan 2013 06:39

No
I would say no as you asked for advice and didn't receive any so no negligent advice was received.

They committed to making your income tax as efficient as possible. Income tax is not paid by companies (corporation tax).

The benefits / circumstances in which incorporating could give a tax advantage is freely available with a few google searches, or purchasing a book such as tolleys tax guide, cheap if you buy one on eBay out of date , good enough to pre inform yourself before visiting an advisor to firm up.

There are many dodgy "qualified" accountants out there, that just want your money and hide behind a veil of confusion that surrounds accounting and tax, but it's really not that complicated.

Thanks (4)
avatar
24th Jan 2013 07:59

My thoughts

I disagree, this is a poor performance.  Doubtless somewhere on your accountant's site the word proactive appears.  On the face of your post this is reactive accounting pure and simple.

For clients who either are, or have the potential to, save tax from incorporation, I have a simple failsafe approach.  I have a little calculator - one for partnership, one for sole trader - with one yellow cell.  Into that the client keys their expected profit, and the result is how much saving - net of extra fees - can be expected from incorporation.

So I am 99% confident that I don't have any clients who feel the way you do, and 99% confident that I never will.  On the contrary, I have several who could save a few £k by incorporating and who are well aware of this but for other reasons have chosen not to.

My guess is that yours is the sort of guy who turns up after the year-end.  In the current market, most accountants are short of clients.  You appear to be a client who is looking for some advice pre year-end at the very minimum, improving your future not just keeping a score of the past.

So the two of you are not a great fit.  Having said that, I'd describe it as sloppy but not quite negligence which has legal implications.

Thanks (0)
24th Jan 2013 08:30

IR35

We don't have all the details, but if IR35 applies then a limited company may not be such an attractive proposition.

Thanks (4)
avatar
31st Jan 2013 15:02

Does not imply hit by IR35

ShirleyM wrote:

We don't have all the details, but if IR35 applies then a limited company may not be such an attractive proposition.

Since the person has been 'happily' (as far as his clients are concerned) working as sole-trader, it seems unlikely that he would be in an "employee-like" position as a "deemed employee" under IR35.

A packaged solution such as FO35 might be of interest ...

Thanks (0)
avatar
By BKD
24th Jan 2013 09:42

I disagree

It is not the accountant's job to decide whether or not a business should be incorporated - though he can make a recommendation one way or the other. But it is his job to arm his client with sufficient information - especially when asked - to enable the client to make an informed decision as to whether or not to proceed.

Any competent accountant would be expected to provide their client with that information, and to make recommendation in the appropriate circumstances. In failing to provide that information, as the OP suggests, I would say that the accountant has indeed been negligent in his duties here.

To say that the client asked for advice, but because the accountant did not provide any advice he cannot be accused of providing negligent advice, is IMO a rather curious analysis. As I see it, you don't have to provide advice to be guilty of negligence. Failing to provide the advice that any competent accountant would give is negligent.

There is a recent case on this type of scenario - not enough time to dig it up at the moment.

 

Thanks (1)
24th Jan 2013 12:22

Even more curious analysis
As it is a feasible and acceptable option to be either a sole trader paying income tax or an incorporated entity paying corporation tax with various positives and negatives associated, and the client had not incorporated before trading commenced, how could not answering a posed question lead to a tort of negligence and compensation? If the client had asked for advice and received it and then acted on the advice and the advice was wrong and a loss was made over correct advice , then indeed negligence seems apparent. Dig up that case be interested to see if it really supported your view.

Thanks (1)
avatar
By BKD
24th Jan 2013 12:51

See above

Steve-EBL wrote:

how could not answering a posed question lead to a tort of negligence and compensation?

David W has explained how.

The point here is not about whether the accountant ought to have been proactive and offered unsolicited advice about incorporating. It is about the accountant's apparent lack of response to specific requests about the benefits etc of incorporating. Requests to which any competent professional accountant ought to have responded. It would be up to a judge, not any one of us on this forum, to decide - based on all known facts, whether failure to provide information and advice to a client when requested to do so was negligent behaviour when compared to that of a competent professional and, secondly, if it was negligent was there a consequent loss?

One defence of the accountant could be that his letter of engagement stipulated that he was offering a compliance-only service and that no advisory or planning was to be included. Even then, on request from the client for advice about incorporation he ought to have replied that such matters were outside the scope of the engagement, and that he should go elsewhere for such advice.

Thanks (0)
24th Jan 2013 08:33

Goodwill, cash flow and a partner

Sounds like you've received a poor service.

Apart of the pure tax savings which can be achieved on profits/salary, were the tax savings associated with the creation of goodwill and the move from payments on account to payments in arrears discussed?

If you have a partner who doesn't work or is on a low income then a partnership could well have been the best solution early on.

Its very easy to use a broad brush approach draw a line in the sand and say all on one side should be incorporated, but its rarely that simple and most business owners have different objectives.

Thanks (0)
avatar
By Old Greying Accountant
24th Jan 2013 09:39

It is not straight forward ...

... you are comparing apples and pears as you can achieve a much lowr "taxable profit" with a sole trade than from a company with the same turnover. Also there are issues such as vehicles, you can often get much more effective tax relief on a vehicle through a sole trade, especially if business mileage is low.

That is before you look at the persobality of teh trader and whether they have the ability to comply with their statutory duties as a director. If limited liability is an issue an LLP may be better than a company.

All an accountant should do is give you the facts, he/she cannot make the decision for you. If you have asked questions and not received answers you should be looking for a new accountant.

Thanks (1)
24th Jan 2013 09:48

Poor service, but . . .

I think you have received poor service.  It MIGHT have been better for you to have incorporated the business earlier - but there are likely to be pros and cons.

Since you specifically asked for advice and did not get it then the accountant could have a legal liability to you for his failure to advise.  (I certainly would NOT agree with a previous poster that an accountant who gives no advice cannot be negligent!)

But quantifying your loss and recovering it from the accountant (more realistically, from his insurers) may not be straightforward.  One would have to consider carefully the responsibilities of the accountant at each stage, what he ought reasonably to have done and when, and the impact that would have had.

If you had incorporated and received a low salary plus dividends there would still have been some tax to pay (and some additional accountancy and other expenses).

Suing your former accountant will lead initially to additional expenses for you in terms of legal fees and accountancy fees (in quantifying the loss).  If you win then those costs should ultimately be recoverable - but you cannot be certain of winning, and you can be certain of being out of pocket initially.

By all means go and see a solicitor to discuss this.

David

Thanks (3)
24th Jan 2013 12:31

More precise
In this instance I feel no response was not a likely successful basis to start a tort of negligence, if as an advisor you had promised to advise on certain matters e.g changes in statute that could effect the client and the advice was not given there would be negligence.

Thanks (1)
avatar
By BKD
24th Jan 2013 10:14

Thanks, David

For the usual concise and clear advice. I think we are largely in agreement. I think that it would be difficult to make a case that the accountant was negligent simply because he failed to advise that the client should incorporate. As has been suggested, there may be plenty of good (including non-tax) reasons why he should not. But the failure to provide the advice and information that any competent account would - to allow a decision to be made - is certainly, IMO, bordering on negligence.

I guess the difficulty may be in proving that, had he been given the advice, the client would have in fact incorporated. It will all depend on the particular circumstances. If there were no material adverse consequences of incorporation (eg IR35) but significant tax savings to be had, I would suggest that it may be reasonable to conclude that most taxpayers in that position would choose the incorporation route. But then again 'material' and 'significant' are subjective.

As David says, a quick chat with a solicitor may be in order.

Thanks (1)
avatar
By mhtax
24th Jan 2013 10:36

IR35

I think Shirley's IR35 point is very pertinent here.

You say you are a consultant with little expenses, and presumably that means you are the fee earner. I would need to be sure you were not caught here as PAYE  would still apply to all the income, ot just your salary, in the incorporated scenario and you would be worse off. I would suggest going to an impartial expert on IR35 to check your status  before you get to the PAYE year end and start to make declarations.

I would also say that my approach to a new business would usually be the sole trader to partnership to company

Thanks (2)
avatar
24th Jan 2013 10:49

suspect it depends

whether you really asked the right question...quite clearly the answer given the limited info we have is that being limited would have been more tax efficient (albeit with the usual caveats re IR35, accountants fees etc).

 

As for the poor advice.....well when i was training incorporating a business was about a multitude of things covering all pros and cons...I always agree with David but on this point i can't, simply suggesting it is poor advice in the absence of anything other than a possible tax advantage is at best a 'guess'.

Thanks (0)
24th Jan 2013 11:13

Poor . . .

justsotax wrote:

...I always agree with David but on this point i can't, simply suggesting it is poor advice in the absence of anything other than a possible tax advantage is at best a 'guess'.

Actually, I said it was "poor service" - not poor advice.  Had the accountant gone into detail with the client he might (quite sensibly) have ended up recommending that the client should NOT incorporate.  My view is that it probably was negligent not to respond sensibly to the query.  Whether any loss arose as a consequence is quite another question.

David

Thanks (1)
avatar
By BKD
24th Jan 2013 11:39

The fault

justsotax wrote:

As for the poor advice.....well when i was training incorporating a business was about a multitude of things covering all pros and cons...I always agree with David but on this point i can't, simply suggesting it is poor advice in the absence of anything other than a possible tax advantage is at best a 'guess'.

The point is not about whether the accountant was at fault for not telling the client to incorporate (although the question title suggests that).

As I read it, the fault here is not in giving advice that is alleged to be poor, but the failure to give any advice at all. If the accountant had given his client the relevant advice (bread and butter stuff for most accountants) - tax savings, other pros and cons etc - would the client have incorporated? We cannot possibly know the answer to that question - though given that he subsequently did, we can hazard a guess that the answer would have been yes. And a judge might reach the conclusion that, having regard to all of the circumstances, on balance of probability the client would have incorporated and that therefore the failure to provide the client with sufficient information to allow him to reach that decision was negligent, compared to what any competent professional would have done.

But as David says the difficulty will be in quantifying any loss. What happens if the OP, having now incorporated (and successfully sued his accountant), finds himself subject to HMRC scrutiny and falling foul of IR35 (reversing any savings already 'made')? Will he then try and sue the accountant - again - for not telling him not to incorporate? It's all hypothetical, and I've reached the conclusion that it is rather pointless for any of us to try and guess the outcome here. It will depend on the full and precise facts - which are known only to the parties involved.

Thanks (1)
24th Jan 2013 11:12

@Mojo - Did you pay for detailed advice?

If a client of mine questions incorporation, I will explain the basics (very basic) and give them some guides so they can go away and think about it.

If they want full tax comparisons calculated, and a long detailed meeting, then I would expect an additional fee, which would normally be deducted from our fees for incorporating the business, if they decide to go ahead.

I wouldn't give endless free advice on something outside of the original service agreement, and I wouldn't want to incorporate a client unless I was sure they understood the pitfalls, as well as the advantages.

Thanks (1)
avatar
24th Jan 2013 11:47

IR35

Can the OP please state his IR35 position? Is some or all of his work:

(a) definitely outside IR35?

(b) perhaps falling within IR35?

(c) definitely falling within IR35?

IMHO that will be a key issue in this case. Remember, no quantifiable loss would mean no damages to claim, so surely the degree of "risk" of IR35 would need to be be factored in.

Why is it that the new accountant must always stir up his newly acquired clients by dissing the outgoing accountant? It's so girlie, and such rank discourtesy / disloyalty to one's professional collegues, not to mention the nauseaseness of such self-promoting chest-beating, must surely contribute to the public perception of us as a bunch of nitwits who can all too easily be played off against one another.

 

 

Thanks (1)
avatar
By BKD
24th Jan 2013 11:58

Huh?

I'msorryIhaven'taclue wrote:

Why is it that the new accountant must always stir up his newly acquired clients by dissing the outgoing accountant? It's so girlie, and such rank discourtesy / disloyalty to one's professional collegues, not to mention the nauseaseness of such self-promoting chest-beating, must surely contribute to the public perception of us as a bunch of nitwits who can all too easily be played off against one another.

  

If a sole trader came to me, with taxable profits of £200k, and no risk of IR35 (or any other material adverse consequences of incorporating) and had been in a similar position for a number of years, I'd feel perfectly justified in asking him if his previous accountant had raised the question of incorporating. (There'd be no point in my wasting my time in going through it with him if he'd already discussed it and turned it down for whatever reason.) If he then told me, truthfully, that he'd asked his previous accountant on more than one occasion about incorporating and that his accountant had ignored all such questions and provided no advice on the matter, I'd feel equally justified in suggesting that he might want to consider a complaint.

Thanks (0)
24th Jan 2013 12:15

Agreed, but . . . .

BKD wrote:

If a sole trader came to me, with taxable profits of £200k, and no risk of IR35 (or any other material adverse consequences of incorporating) and had been in a similar position for a number of years, I'd feel perfectly justified in asking him if his previous accountant had raised the question of incorporating.

 

This was a brand new fledgling business that took off rapidly. Even now it's only 6 months old. Many a time I've had a a new client with a new business idea who has no idea how it will fare or even their commitment to it. Some are even looking for a new PAYE job at the same time and see their 'new business' as a last resort. Under those circumstances I am not so quick to recommend incorporation. 

Thanks (1)
24th Jan 2013 12:12

They don't

I'msorryIhaven'taclue wrote:

Why is it that the new accountant must always stir up his newly acquired clients by dissing the outgoing accountant?

I don't think all accountants do diss the previous accountant. I know I don't.

I have learned (from experience) that one side of the story isn't always the full story.

Thanks (4)
avatar
24th Jan 2013 12:14

Thanks for all the feedback. Some additional information that may help

1) i wss employed and paying PAYE until July of the tax year. My PAYE income was around £40,000 at this stage of going it alone.
2) definitely outside of IR35
3) my total income for the tax year when i was finally incorporated was over 6 figures
4) i very much worked on my own - my business is essentially me and is service based - no cars, tools, equipment, etc. my expenses were essentiily a share of my home costs, some purchased IT equipment. There were not any partners.
5) on one of the occasions I asked, when i pointed out that i now had close to a 6 figure income for the tax year, my accountant mentioned that if i make a loss, my sole tradership would enable me to get a tax refund in earlier year's PAYE - even though i had few relatively few expenses and a 6 figure income at this stage. Addiitionally to this request, they suggested that if my sole tradership made a profit, then in the following year there was scope to form a limited company and sell my personal intellectual property (from my sole tradership) into your limited company. This would give me a tax free payment from your limited company to you. However, no information was provided on the risks or about how a limited comoany may/may bot be advisable. Also, they incorporated my ltd company in February of the same tax year. Naively, perhaps, the correspondence between my accountant and I suggested that the accountant would be responsible for all my affairs and for making my accounts tax efficient. Rightly or wrongly, this is what I needed at the time.

As mentioned, I do not wish this to be accounting-kicking exercise. It is hopefully a valid question regarding my previous accountant that may leave me with either a valid case for seeking compensation or an expensive learning experience - either of which i am resigned to. Similarly, my new accountant has not been criritcal. They have simply provided advice to questions asked by me during the preparation of my sole trader accounts and self-assessment and their answers have been on accounting possibilities rather than the profiency or otherwise of my previous accountant.

Thanks for reading.

Thanks (0)
avatar
24th Jan 2013 13:07

Is "5" the Answer?

Mojo1999 wrote:
Thanks for all the feedback. Some additional information that may help

1) i wss employed and paying PAYE until July of the tax year.....

 5) ...they suggested that if my sole tradership made a profit [during its first year], then in the following year there was scope to form a limited company and sell my personal intellectual property (from my sole tradership) into your limited company. This would give me a tax free payment from your limited company to you.

Isn't that the key item? ie the advice to trade from August to the following 5th April so as to establish a profit base for goodwill valuation.

 

Mojo1999 wrote:

However, no information was provided on the risks or about how a limited comoany may/may bot be advisable. Also, they incorporated my ltd company in February of the same tax year.

The first sentence shouldn't matter, as you don't appear to have suffered any financial loss from running a limited company.

Re the second sentence, do you mean they formed the company February of your first trading period (which was Aug to 5th Apr) or do you mean February of the following year? 

Thanks (1)
avatar
25th Jan 2013 14:01

'Girlie'?

I'msorryIhaven'taclue wrote:

Why is it that the new accountant must always stir up his newly acquired clients by dissing the outgoing accountant? It's so girlie, and such rank discourtesy / disloyalty to one's professional collegues, not to mention the nauseaseness of such self-promoting chest-beating, must surely contribute to the public perception of us as a bunch of nitwits who can all too easily be played off against one another.

Slightly off-topic, but why is dissing the outgoing accountant "girlie"? That behaviour is rude, unprofessional or discourtious. However, most of the females I know aren't any of these qualities, so I feel your use of the word "girlie" is actually quite offensive.

Thanks (4)
avatar
30th Jan 2013 10:58

An Apology to Emily (and Most of her female associates)

emilyduffy wrote:

Slightly off-topic, but why is dissing the outgoing accountant "girlie"? That behaviour is rude, unprofessional or discourtious. However, most of the females I know aren't any of these qualities, so I feel your use of the word "girlie" is actually quite offensive.

Sorry Emily, no offence intended. I just meant it's rather cissyish behavior when it eminates from a bloke. Bitchy, even.

You must forgive me. It's very easy for us old timers to inadvertently put our foot in it in when it comes to PC. In a Dragon's Den session Deborah Meaden, addressing a foodie entrepreneur, once announced that she herself does not cook:

Duncan Bannatyne: "What? You don't cook?"

Deborah Meaden (eyes rolling): "No Duncan, I don't cook"

Duncan Bannatyne (incredulously): "But you're a woman!"

Thanks (1)
avatar
01st Feb 2013 15:08

Thank you I'msorryIhaven'taclue

I'msorryIhaven'taclue wrote:

You must forgive me. It's very easy for us old timers to inadvertently put our foot in it in when it comes to PC.

Thank you, your apology is appreciated.

Personally, I believe it is worth pointing out - if it makes one person think and consider what they say, then it is worth it.

Thanks (1)
24th Jan 2013 11:53

Claims for negligence

If the OP (original poster) sued his former accountant for negligence then (eventually) a judge would have to decide what a reasonably competent accountant should have done in the former accountant's position, and when, and what loss (if any) the OP suffered as a result of that not being done.

Note the judge will not be trying to decide what best possible outcome might have occurred had a superstar accountant with power to see into the future been instructed!  It's more like, "What would your normal accountant sensibly have done with the information and instructions he had?".

Then the judge needs to consider what loss the client suffered as a result of a below par performance.  That includes taking a view as to what the client would have done had he received appropriate advice.

So it is by no means certain that, at the end of the process, the judge would be ordering a payment to the disappointed (former) client.

David

Thanks (0)
avatar
24th Jan 2013 12:24

There Are Lots of Reasons Not to Incorporate

Mojo 1999 - if you search on this site for "Disadvantages of Incorporation" you will see that it is not a simple case of calculating a tax liability. Incorporation needs a lot of thought and discussion - it is not something an accountant should just advise as a matter of routine. In any event what your accountant does for you depends what has been agreed in the engagement letter.

Thanks (2)
avatar
By Old Greying Accountant
24th Jan 2013 12:20

My MO is thus ...

... the date the relationship starts is per the engagement letter, I advise my client going forward to the best of my ability.

The past is a different country, if my client feels from my advice he may have been badly advised that is up to him. Unless sepcifically asked my brief is not to review work of previous accountants, but to advise on the situation going forward.

As mentioned above at best it is girly to "diss" the outgoing accountant, at worst unprofessional. If asked my usual answer is "on the face of it that is not what I would have done, but I don't know the facts of the situation or the information they had so I can't really comment, if you want me to review their work that would involve a cost of (inset figure with lots of noughts)."

Thanks (1)
avatar
24th Jan 2013 12:32

Yes David....sorry i realised that

on posting i hadn't used your wording.  I do feel that we can all be a little to eager to join the ambulance chasing society and chase compensation (often when it is unwarranted).  The accountant in question didn't give any advice....but then again we only have the clients word that he actually asked that specific question....was it in writing....was it in passing....can he prove he asked for the advice? (think this is really the starting point).

As for compensation, well I guess i feel pretty uncomfortable about a position where I can be sued because i didn't give advice on the most tax efficient 'products' (i will have to look at that scheme Jimmy Carr found oh so tax efficient - i am sure i haven't advised my clients about that....)

 

 

Thanks (0)
avatar
24th Jan 2013 12:46

Hi all

Please note I am not accountant-kicking. If it is mea culpa, I can accept that but I simply wanted to see what my options were, if any. The questions posed to the accountant were in writing and were as follows:

First time i asked the question: "whether it's worth me being a sole trader or ltd business" specifying that i may go travelling at end of tax year

Second question asked: "I had assumed the additional cost would include all submissions and best accounting knowledge to ensure efficiencies in all submissions?" To which i received a yes reply.

3rd time of asking) "Can i just check whether sole trader is stil preferable to ltd co?"

My sole trader takings ytd are approx £60,000 (inaddition to my PAYE earnibgs for the year)
Assuming a salary of £x (0% tax) for sole trader or ltd co, provisionally it looks like my overall tax and national insurance rate would be approx x% for limited company and higher x% for sole trader.

Obviously i'm not taking operational costs nor admin costs for a ltd co but is sole trader still the best option?"

Thanks (0)
avatar
24th Jan 2013 12:54

As pointed out

previously IR35 has a potentially major impact on any suggested structure.  A question asked about trading thru a Ltd Co should be answered....but if not then to be honest I see that as your responsibility....if you didn't get an answer (presumably you asked because you were aware of some potential benefits) then you should have asked again or gone to another adviser.  

 

 

Thanks (0)
avatar
24th Jan 2013 13:08

Tax savings may not be as high as you think

Whilst it may be feasible to defer some higher rate tax by delaying taking dividends from the company, presumably if profits continue at the current rate you will have to pay substantial income tax sooner or later, even with the ltd company, unless you choose to leave profits in the company. The savings will largely therefore be national insurance, which might amount to only a few thousand, still worth having I know.

Thanks (0)
24th Jan 2013 13:39

Zara

What Zara has said is exactly what I was thinking, it's not really that massive a deal (if higher levels of profits are going to continue for a while) apart from a few thousand of NI pa. At least the self employed money that was earnt is now his, and not tied up in the company.

Thanks (0)
24th Jan 2013 13:36

what about VAT?

Difficult to comment on this without knowing the full story.

However, another area that needs to be considered is VAT.

I am thinking that the flat rate scheme would lead to VAT savings in your situation.

Did your accountant give you any advice on this?

 

Thanks (0)
avatar
By DMGbus
24th Jan 2013 15:27

Compliance costs & client abilities

Apart from issues like how "much tax might be saved" and "is it disadvantageous from a public information at Companies House" viewpoint there are the compliance issues to consider.

A Ltd Co has a lot more compliance issues.

Nowadays another phrase that should be used in substitution of "compliance issues" is "opportunities for HMRC and other Government Departments to impose penalties / fines".

Such opportunities are mutliplied with incorporation.

It is an fortunate fact that some business people lack the organisational skills to be capable of being compliant with all the extra issues that incorporation brings.

When I advise on the tax savings to be had from incorporation I mention the compliance issues and the fines/penalties to be sufferred if the client is incapable of supplying information on time to meet deadlines.

Another issue is that it "easy to be wise after the event".  It is most certainly not the case that an adviser will have prior accurate knowledge of a current or future year's levels of profit.   After the annual accounts have been drawn up then (and only then in most cases of small busineses) will an accurate cost/benefit appraisal of business entity tax options be possible.

An issue sometimes overlooked with start up businesses (ie. no accumulated reserves to draw from as dividends) is what label to attach to the directors' drawings - salary (lots of NIC/tax), dividends (illegal without profits / reserves) or loan drawings (with extra tax and tax compliance costs).

On the dividends front for a new company, yes it's possible to draw up interim accounts but would a client be willing to pay for this extra cost?  Some clients seem to think that preparing VAT returns tells us what the profit is!

 

 

 

 

 

Thanks (0)
avatar
24th Jan 2013 14:02

Isn't hindsight wonderful?  Given the benefit of hindsight, it would appear that a limited company may have been better (assuming no IR35 which is still not answered by the OP).  

Another question is whether the OP has taken the profit out - if he has, then he'd have been hammered for HR tax on the dividends/payroll so overall tax wouldn't have been much different.

If IR35 was likely to apply, then OP would have been worse off with a limited company rather than a sole trader due to the double national insurance.

Did OP tell the accountant from the outset that profits would be so high with such certainty?  Personally, I'm always very sceptical about clients' profit forecasts because usually they are way too optimistic.  If in fact losses occurred, then those losses as a s/t could have proved useful to get a tax refund from the PAYE tax.  If profits are lower than planned, then the new client may have to draw out all profits as dividends, or if inadequate, take loans etc with their tax consequences!

I think it's far more normal practice to set out as a sole trader (if possible) and then incorporate once you know profits/drawings with certainty to avoid the costs/hassle of dealing with a company and also for the potential benefits of goodwill transfer and also to keep options open in case of losses.  From the OP, it seems that incorporation occurred within six months of starting, which I don't think is a particularly long period.  OK, circumstances may show that incorporation should have happened earlier, but I'd question what concrete information did the accountant know, and when did he know it.

Thanks (1)
avatar
24th Jan 2013 15:31

The accountant had all my costs and revenue at the time of being asked the question for the second and third time so it was clear that my profits were already high l - certainly at the third time of asking. My business was incorporated months after the 3rd time of asking, by when quite a bit more income had been generated. The accountant knew my business set up and there was no information relating to my business and accounts that was hidden or not available when i asked the questions. IR35 was also agreed as being cleared by this stage. All of this was communicated and discussed in writing and in person.

I appreciate how difficult it is to answer a question when you are not party to all the information but I truly appreciate the feedback and consideration given to what I guess is a sensitive question anyway. I've taken away much food for thought. Thanks.

Thanks (1)
avatar
24th Jan 2013 16:09

Incorporating your business

Dear Mojo

first of all, allow me to congratulate you on the success of your business to date!

Clearly, judging by the number of responses, you have raised a point which is of interest to a lot of people.

Could I just ask you how much you were paying the accountant who you feel may have let you down?

Was it

(a) between £100 - £500 per annum

(b) between £501 - £1,000 per annum

(c) between £1,001 - £1,500 per annum or

(d) more than £1,500 per annum?

L

Thanks (0)
avatar
24th Jan 2013 16:43

hmm..

well i guess i would agree that there were grounds to sue if you had instructed the agent to incorporate your business but you didn't....you asked what the issues were.  And lets be clear there is more to a company than just a potential tax saving....compliance costs are more....more filing penalties flying around to name but a few.

 

So i guess given all the discussions (although you seemed to indicate it was a one way conversation originally with you just asking??!?!) did you at any point say, right lets incorporate the business?

 

 

Thanks (0)
By Glennzy
24th Jan 2013 19:07

I am not sure you would get anywhere with legal action
I think the guy could have advised you better if what you say is the full picture and I on the information provided would of set you up as a company from the day 1. If you had specifically wanted to set up a Limited company and he advised not to or actively discouraged this than maybe you have grounds to take action against him. If he has set you up as a sole trader but registered you with all authorities etc it is not necessarily bad advice, it's just not good advice. Other things to bare in mind are how much money you require to Draw from the company as if your earnings are in excess of £100,000 large amounts of tax are a bi product of your success and are unavoidable. Limited companies are not a 1 size fits all solution as it depends on a lot of things even down to simple things like owning a car, so there a lot a factors to consider before you really start to trade. So whilst I think the advice you received maybe not be classed as cutting edge I don't know if you could prove that it was specifically bad in a court of law. Remember he will have PI insurance which will defend him in any legal action, you would have to fund your legal costs yourself, and could you therefore afford to lose. I would put this down as a costly first lesson in business and move on, and get things right with your current advisor. The Internet is a fantastic resource of information, and with hindsight maybe some research prior to starting to trade would of at least given you a basic knowledge of your options, to prepare you for your initial meeting. Also most accountants would give a free first meeting so meet with 2 or 3 before making your mind up. They are advising on same subject so should give similar responses but many don't. If your in North East I would happily take you on.

Thanks (1)
avatar
By Old Greying Accountant
25th Jan 2013 10:08

Bottom line is ...

... is you had asked him for opinion/information and you had not got it you should have changed accountants at that point. That is down to you, IMVHO.

Failing to respond to your requests may be a disciplinary matter with his body but not a strong case for a legal claim against him.

If you made a decision based on his advice/opinion which later turned out to be flawed then that is a different matter.

 

Thanks (0)
avatar
By BKD
25th Jan 2013 10:24

I think there is another bottom line

We are trying to work out may ahve been said, or not, and advise accordingly. The bottom line is that only a competent legal adviser, armed with all of the underlying facts, is in a position to advise on whether there is a case to be made.

Thanks (0)
avatar
25th Jan 2013 12:17

Sounds like a case to me...

Taking the OP at face value, the new accountant has said that you would have been better off being incorporated.  You seem to have asked specific help from the previous accountant who did not provide it.  You have to prove he had a duty of care - legal question but I would have thought so - and you have to show a loss arose from his failings.  Sounds like you can show a loss so matter of working out how much with all the above comments to be considered (IR35 etc).  Presume your new accountant can help you with that.  Good luck!

Thanks (0)
avatar
By JDW
25th Jan 2013 13:28

IR35

How is the OP so sure he isn't caught by IR35?

Thanks (1)
avatar
25th Jan 2013 14:02

my 2 p worth

Did you ask him in writing. did he reply with a calculation showing the differences. Did he then charge you a fee. Was the calculation wrong? If so thats negligence that can be proved..or

 

Have you got contempareneous notes of the neetings have you got written down what he said.and the financial differences.  Did he charge you for the meetings. Then you have a stronger case...

 

I have seen this over 100 times from the it ought to be better to be a company side. I have had clients crying in the office when I tell them the difference...

 

I have yet to see them sue the old accountant, because of the above.

Thanks (0)
avatar
25th Jan 2013 16:30

Thank you again for your considered replies. There are always 2 sides to any situation and I accept there is a duty of care on my side. However, might be worth adding that my accountant did not provide a letter of engagement but did provide several documents and several emails stating that they would take away all my worries, would minimise my liabilities (note this was not specifically income tax) and make my accounts as efficient as possible. At the time, rightly or wrongly, this is what I needed and is what I paid for (at a rate exceeding £1,500) for the year.

I asked the sole trader vs limited company question 3 times. I was advised in writing that making a loss and transfer of goodwill was the route to take. Given my relatively high income, low costs, intention to go travelling, IR35 not applicable, advice was given to suggest one route - i.e, stay as sole trader, make a loss, goodwill transfer - over the other but no advice was given on the ltd company risks or benefits. In one of the questions, i even described in % terms how I thought a ltd company may benefit me in terms of lower liabilities but, again, stay as we are, make a loss, goodwill transfer was the answer.

I am very much a 'put as much as possible in writing' person - a requirement of me being a consultant - so the questions and answers and interim discussions of service and service levels were in writing. Note i was on their top level of service as I needed hand-holding at the time.

Reading between the lines, it seems like I need legal advice and due consideration of likely costs and hassle versus potential redress. I will evaluate whether worthwhile or whether to let it lie but thanks very much for your considered replies.

Again, to confirm, I am not attempting to create a 'client-good, accountant-bad' scenario because as a consultant, I am aware how such relationships need transparency and duty of care on both sides so thanks for the feedback on this as well.

Thanks (0)
avatar
25th Jan 2013 16:39

And at any point did you say incorporate my

business....nope...seems not.  The last time i got ignored at a shop i walked out and purchased the item from another shop. 

 

Originally i got the impression you didn't know what advice you required...but it seems you were quite competent (indeed you understood the potential benefits)....it seems you didn't really need the advice...which i suspect undermines your case.

 

Perhaps before suing you should consider what you believe is 'fair game' for compensation in claims against you and which, even with a poor service provided you would consider the loss of the client the cost.....I suggest in future when you ask for advice and don't get it you move to an adviser who will give it....it ain't rocket science....its just common sense....

Thanks (1)
avatar
By jndavs
25th Jan 2013 17:01

IR35

The question has been asked several times, as a consultant you are exactly what the settlement legislation is aimed at, on what basis is IR35 not applicable?

Thanks (0)
avatar
By Old Greying Accountant
25th Jan 2013 17:18

I'm an accountant ...

... not a lawyer - life's too short!

Thanks (0)

Pages