Can Inspector Do This?

Can Inspector Do This?

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Full tax enquiry underway. Inspector has reviewed sales, purchases, prices, margins, etc., and it is clear that the accounts are nonsence. But the quirk is that there aren't enough purchases to justify the sales levels, so either purchase invoices have been left out/lost or sales have been over-stated. Despite this, Inspector is claiming that if purchases have been understated, there is every chance that purchase invoices have been deliberately ommitted and therefore he has grounds for believing sales are omitted as well, hence wanting personal bank accounts and review of directors personal affairs to check for undeclared income. Can the inspector continue along these lines on such a flimsy reason - it seems he is taking the inadequacy of the records to extremes.
Ken Howard

Replies (11)

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By neileg
13th Jul 2007 15:26

Not an either/or
Fiddling the books can take many forms. Obviously the simplest is to simply trouser the cash out of the till. Those fiddlers with a couple of extra brain cells realise that if they suppress the sales, they have to suppress the purchases, too. But they don't always get it right!

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By lawco
13th Jul 2007 16:16

You have answered your own question
I do not want to make what must be a most unpleasant experience more so but you have really answered your own question when you say: "...........and it is clear that the accounts are nonsense." Given what you say, the answer is a definite "yes". I realise that I am playing the Devil's Advocate but is it any wonder that the Inspector wants to delve into the background?

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By clive griffiths
13th Jul 2007 19:34

Information Underload
What exactly is the nature of this business? Once the credibility of business records are shot because of proven ommissions of either sales or purchases, everything is suddenly up for grabs.

So....what is the nature of the business and what is the cash, cheque, debit card ratio for sales. In a case like this, these little questions would represent just the very start! You may be in for a long ride. If you need technical assistance let me know?

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By billgilcom
14th Jul 2007 00:11

Accounts Nonsense?
Who says the accounts are nonsense? If it is the Inspector has he actually broken the records to show there are inadequacies in the record keeping. If he hasn't in my view he hasn't shown anything and he can postulate on his navel all day if he likes as he certainly hasn't proved that profits are understated.

You probably need to consider the veracity of the accounts and records and see if HMRC have actually broken the records. Another question is exactly what sortof figures are we/he/her talking about. Try giving a fuller account for a fuller response or if appropriate contact me

[email protected]
and pay my website a visit at

http://www.wamstaxltd.com

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By billgilcom
14th Jul 2007 00:13

Oh yes nearly forgot
What has your client got to say about it AND if he has been fiddling then bring matters to a head by making a full disclosure of what has been going on etc etc

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By User deleted
15th Jul 2007 11:06

Flimsy reason?
I'm not sure that there is a "flimsy" reason for the inspector pursuing the matter. Subject to the point earlier that there's not a lot of information about the type of business, I think that there are genuine grounds for suspicion.

Firstly, if there are purchases that don't appear in the accounts, how were those items paid for? Does it lead to the possibility of under recorded takings -with immediate VAT consequences for a registered business? And if takings were under recorded to meet purchases, what about other items being paid "out of the till?" Additional drawings.

If the items were paid for privately, then the accounts that they wer paid from are legitimately available to the inspector, and of course could raise the need to confirm that drawings or other resources were adequate.

Inspectors commonly try to discredit the records for minor errors, claiming that they are not fit for the production of accounts, and such nonsense needs to be firmly resisted. In this case, however, I think that the inspector has grounds to look for other evidence.

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By IanRiley
15th Jul 2007 19:45

Hello
I remember a similar case I dealt with in a former life as a tax inspector.
It was clear that the accounts of a newsagent only included 10 out of 12 months purchases. Miraculously, the takings resulted in the GPR being what the Revenue would expect of a Newsagent (approx 17%). If the correct purchases had been included the GPR would have been ridiculous (in fact I think it would have been a GLR !).
Clearly the takings records had been 'made up' and a sizeable addition to profits was agreed.
I by no means always take the side of the IR but I think the inspector has every right to dig a bit deeper here.
I'd be interested to know in what sense you think the accounts are nonsence. You seem to be saying that the margins in the acounts are too high. Has the stock on hand figure been calulated correctly ?

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By billgilcom
16th Jul 2007 10:57

Other purchases
Can you elaborate on the questions posed earlier?

Also if the purchases were minor and potentially used by other members of the family etc. this would need to be considered.Of course you don't want to be introducing red herrings that would only serve to add to Inspector's concerns
regards
[email protected]

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By Ken Howard
16th Jul 2007 13:26

Thanks for the replies so far. More information as requested.

The company suppliers a certain product to mostly retail customers by means of a web-site and mail order via news/mag adverts. There is no shop and no sales made other than mail order. The directors are "hands off" - the orders are received, processed and despatched by a mailing house/warehouse set-up, so directors never handle the orders, goods, nor money themselves. I would have expected such a set-up to be pretty damn good for proving completeness of sales. The mailing house issue monthly invoices showing the number of orders processed, etc., which does tally with the sales invoice printouts. Mailing house look after debtors etc. The directors do talk to a handful of wholesale customers who are shops etc., but goods are still despatched via the mailing house. Purchases are from one supplier in relatively large batches - just a handful of deliveries each year.

The problem is that in the period under enquiry, the purchases of goods for resale are too low - they have sold more than they bought. Looking further into it, I am fairly certain that this is caused by opening stocks being grossly understated, but unfortunately, for other problematic reasons, there is no trace of the stock lists nor how the stock figures were arrived at.

Worst still, the mailing house have changed staff and are now being extremely un co-operative to the extent that they have been sacked and replaced by another similar firm, so no chance of any goodwill from them to help fight our corner.

Presumably, if I can demonstrate opening stock is wrong, and therefore effectively re-open the previous year(s) for enquiry, they would concentrate there and not go after the directors personal accounts? Or would they?

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By billgilcom
16th Jul 2007 19:50

Why didn't you say this before?
Clearly if as you say the director's are hands off with stocks being held by a third party warehouse - assuming all at arms length - then why have you let it get to the stage you have with requests for director's personal accounts.

Who did the accounts and what information was requested from the warehouse as to stocks that were held? If none then are we solely dealing with company's negligence or auditors/accountant's throwing figures together without any thought to the third party stocks held?

I think that the company needs advice badly and needs to come clean to HMRC as to the limitations of their ability to control the sales and stocks etc. Yes Ok they look like they are going to pay for it but all tis should have been brought out at the start - not once HMRC have it in their mind that purchases and sales have been understated.

Poor show I think and you need to get in there and talk to the Inspector
regards
[email protected]
http://www.wamstaxltd.com

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By martinfoley07
16th Jul 2007 23:31

Ken, I would carefully ....
...re-read your own initial posting wording in the light of your follow up info.

Is it not the case that you were very selective in the initial posting briefing? (even accepting that full details of any case can never be given in short public posting).

Has this been the way the enquiry queries have been handled to date?
If so, that may of itself be a reason HMRC is off on all sorts of scents and trails, rightly or wrongly?

Is the HMRC reason flimsy as you suggest, given your comment that the directors (and accountants?) have not the foggiest idea what the stock levels are/were in drawing up the accounts, either this year or last year?

If accounts are effectively "agreed" to be nonsense (as seems the case here), then absent very clear reasons as to how/why the nonsense came about, it is surely inevitable HMRC will cast their net wider? I'm not sure you would get too far arguing their case was flimsy, and agree with William you need to get in there with the Inspector concerned to sort out the situation.

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