Alerting clients versus walking away from clients

Alerting clients versus walking away from clients

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Still relatively new to all this. A question on ethical standards.

If one has a client who chooses to sail very close to the wind with regard to their taxation and are prepared to take the risk of getting caught and take the punishment at what point do you move from advising the client that what they are doing is either not correct or at best dubious to walking away and saying you are not prepared to do the work.

Example I encountered recently with 2 new clients. They had a jointly owned property that they rented out. Income after expenses about £5,000 per annum.

Client A was high rate taxpayer; client B was a basic rate taxpayer. For the last few years they have put all the rental income on client B's tax return and it has therefore been taxed at basic rate!

I have just taken the clients on and they have recently sold the property and are splitting the gains 50/50!! Some CGT  tax is payable.

The sale and CGT is on this years tax return which I am dealing with. The dodgy bit with prior year rental,income is on tax returns I didn't prepare.

I have advised them they ought to come clean with HMRC about prior years and settle up the difference and any penalties. The clients would rather let the sleeping dog lie and hope it doesn't get picked up. I have advised that if HMRC discover the issue the penalties would be higher.

Is it ethically OK for me to handle this years return knowing about the historical problem or do I have an obligation to flag it up eg as a MLR issue. Obviously the sums involved are quite small which is why the client wants to ignore it.

Replies (7)

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By Moonbeam
21st Nov 2014 17:45

This sort of client will always want it swept under the carpet

Since it is as clear as daylight to you that they've got it wrong, no matter the reason you must insist they come clean to HMRC. If they refuse, then you can't act for them any more, and must without telling them make a money laundering report.

Since many in HMRC seem to think all accountants are up to no good and helping clients hide all sorts of "discrepancies" I don't think you are doing the rest of us any favours.

That's money laundering for you.

As to ethics, surely you know what is right here.

We have to manage our clients. It starts when we sign them up. The ones that I speak to or see prior to signing up who are dodgy immediately set up alarms in my gut and I just don't act for them. I don't want to be tarred by the same brush and I don't want to waste time persuading dishonest people to do things they won't want to do.

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By andy.partridge
21st Nov 2014 18:04

Agree with Moonbeam

Obviously the sums involved are quite small which is why the client wants to ignore it.

Usually it's the reverse, isn't it? It tends to be when the sums are quite large that the 'crooks' want to ignore it. 

Unfortunately this is a test for you. It won't be the last you have but your response to the first will probably set the pattern for future ones. 

Before it becomes an ML issue, you have the opportunity to influence and persuade. They might think you wouldn't rock the boat because you risk losing your fee. They don't realise you are are not that shallow, though, do they?

On another level who would want to work with clients that take no notice of your advice. Wouldn't it be a little humiliating for you if they didn't care what you think? Certainly not the basis of a sustainable business relationship. 

Good luck.

 

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By Duncan Cameron
21st Nov 2014 18:59

There may be nothing wrong.

The clients are called A & B. Not Mr & Mrs A. They are probably not married to each other.

Such owners are entitled to split the income and capital in any way they choose provided they go about it the right way.

This is what HMRC say at PIM1030:

“Where there is no partnership, the share of any profit or loss arising from jointly owned property will normally be the same as the share owned in the property being let. But joint owners can agree a different division of profits and losses and so occasionally the share of the profits or losses will be different from the share in the property. The share for tax purposes must be the same as the share actually agreed.”

See also Kings v King.

If the clients were properly advised all could be in order.

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By Justin Bryant
22nd Nov 2014 14:21

I could not agree more

With DC's above comment. Search this website for this same issue as it is a regular question.

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By andy.partridge
22nd Nov 2014 22:52

Well . . .
The question was about ethics not tax.

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By King_Maker
23rd Nov 2014 08:36

What ethics are involved, if the clients have done nothing wrong?

Unmarried joint owners can share income, expenses and capital in differing ratios, as long the taxation reflects the agreement. Robust documentation recommended. 

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By soundadvice
23rd Nov 2014 10:06

Sorry been away for a day!

Just to clarify the 2 new clients I am dealing are married. Which may affect the opinions expressed above. Would that be correct?

Client B (basic rate taxpayer) has put all the income on his returns (including A's share!!; A is the higher rate tax payer); kind of opposite to income splitting!!

As I said my advice to them is to advise HMRC that all the rental income in the past has been assessed on Client B's tax return (the basic rate payer) but part should have gone on A's return  the higher rate tax payer

If the client does advise HMRC of the error are HMRC likely to agree to rebating some of the tax paid by B as well as making the charge for unpaid tax on A? Should A & B write to HMRC jointly to explain the situation? Or is it up to A (who hasn't put any rental  income on his return) to advise HMRC on his own?

In terms of discovery; if A and B decide not to do anything is this a potential "discovery situation" or does the fact that B has reported ALL the rental on his return and they are proposing to declare the gain made on sale jointly on this years tax returns avoid it being classed as a "discovery" because HMRC know there has been income and will know there has been a capital gain?

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