Business making losses every year

Business making losses every year

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I took on a client recently and they sell on Ebay.

They started in 2006 and are making losses for the past six years.  I just don't think this is the correct picture and they are perhaps making a small profit though do not have much proof at the moment apart from saying we do not want to pay tax.   They carry out their own book-keeping

If a business is making loss after loss especially when trading on ebay would this increase chances of an HMRC investigation.

Are there any other implications that I should consider ?

Replies (14)

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By holywood
19th Nov 2013 13:08

A few implications:

HMRC may well commence an enquiry into the client's affairs but I would proffer this would only occur if they were trying to utilise certain reliefs or allowances. 

I suppose the key considerations would be: 

1. Are they in fact 'trading' (lack of profit-seeking motive)? 

2. Are 'trading' losses available for offset or future use? 

3. Could HMRC seek to deny IHT & CGT relief? 

This is on the basis that they are not merely cooking the books. I am sure you will be aware of the implications if this is the case...

 

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By vince8
19th Nov 2013 13:15

More searching questions required

Trading on ebay and making losses for 6 years. Is that a joke?

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Euan's picture
By Euan MacLennan
19th Nov 2013 13:16

Hobby farming

I am not sure of the source, but I seem to recall that if a farmer does not make a profit once every seven years, HMRC will regard him as being a hobby farmer - not in it to make a profit - and will therefore disallow his losses as a deduction from his other income.  I doubt that their view would be restricted just to farmers.

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Replying to SXGuy:
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By Anthony123
19th Nov 2013 13:58

BIM75625

There is specific legislation relating to farming - see reference above.It's not just HMRC practice.

Quite correct though that HMRC might look askance at continuing pattern of losses though perhaps might not investigate unless losses being offset or actual turnover was sufficiently high to suggest that disallowance of expenses would produce a taxable profit worth assessing.

I have seen e bay traders think they can claim entire running costs of home because they are working from home - what are the expenses looking like I wonder?

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By ireallyshouldknowthisbut
19th Nov 2013 13:24

.

Either they are not very busy savvy, albeit its easy to lose money on these types of things.  It is not uncommon for people to be seduced by turnover and make no money despite having a huge turnover.

Or it could simple be they are lying to you.

So which is it?

It ought to be quite easy with an ebay business to look at some typical high volume selling items and assess the GP (including ebay fees) and compare that to the actual GP, and also track the number of sales (unless customers typically purchase multiple items) and cross reference to the number of purchases. ie bog standard sanity checking.

Take what half an hour to do that if you have access to their records?

Your basic fraud would to be have two ebay accounts and only book the sales of one of them but all the costs. 

 

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By colinhigginson
19th Nov 2013 15:33

Definition of losses

To expand a little - losses are before capital allowances so you could have a taxable loss but it is still treated as a profit for trading definition purposes.

I remember looking into farm loss making businesses and the txt says that a farm is regarded as profit making if a competent farmer could farm it at a profit. So basically, tell HMRC that your client is incompetent and keep claiming the loss relief!

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By mark24c
19th Nov 2013 20:57

Are they claiming Working Tax Credits?

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Replying to davechaplin:
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By Jim100
19th Nov 2013 22:48

NO WTC

mark24c wrote:

Are they claiming Working Tax Credits?

Nope

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David Winch
By David Winch
19th Nov 2013 22:06

Be aware

The client needs to be aware that the authorities can, in certain circumstances, require ebay and PayPal to produce their records of the trader's transactions over the past several years.  Those records may reveal that the information which the client has provided to you is not the whole story.

This is more likely to happen if the client comes under investigation for possible benefit fraud (Income Support, Housing Benefit, Tax Credits etc).

Obviously if you suspect that your client is evading tax or fraudulently obtaining benefits then you need to consider whether you have to make a Suspicious Activity Report to the NCA under MLR 2007 / s330 PoCA 2002.

David

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Replying to gordo:
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By Jim100
19th Nov 2013 22:55

Just a hunch

davidwinch wrote:

The client needs to be aware that the authorities can, in certain circumstances, require ebay and PayPal to produce their records of the trader's transactions over the past several years.  Those records may reveal that the information which the client has provided to you is not the whole story.

This is more likely to happen if the client comes under investigation for possible benefit fraud (Income Support, Housing Benefit, Tax Credits etc).

Obviously if you suspect that your client is evading tax or fraudulently obtaining benefits then you need to consider whether you have to make a Suspicious Activity Report to the NCA under MLR 2007 / s330 PoCA 2002.

David

I don't have any evidence that they are evading tax. Though I can't see how you would fail to make a profit on ebay otherwise no point in trading. They might as well do something else.

I only get a spreadsheet with income and costs so do not get the full picture. They buy items from china (from friends) and then sell on ebay.  I suspect these invoices from friends are inflated.They do make a Gross Profit of around 20% but probably should be higher.  I would have thought 50% GP would be minimum.

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David Winch
By David Winch
19th Nov 2013 23:22

Your suspicion appears to be based on (i) the inadequacy of the records being made available to you, (ii) the apparently unexpectedly low GP %age, (iii) the continuing losses - meaning that logically you would expect your client to have stopped trading, and (iv) your 'hunch' that the purchase invoices from friends are inflated.

The picture from this (admittedly circumstantial) evidence leads you to suspect tax evasion.  That is a reportable suspicion of yours.  You should file a Suspicious Activity Report with the NCA.

Do not make the mistake of thinking that circumstantial evidence is somehow not evidence.  Murderers have been convicted on circumstantial evidence!

David

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Replying to AnthonyG:
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By Jim100
20th Nov 2013 12:49

NCA

I understand your point and its correct what you are stating but practically..

The sums involved are not huge.  Turnover is around 50K.

I imagine there are so many traders not paying tax.  I cannot believe SOCA or even HMRC would have the resources to investigate each case. We can go into the merits of the legislation but just seems pointless reporting based on circumstantial evidence though there is a duty to report.  I am sure nothing will happen.

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Replying to johngroganjga:
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By Jim100
20th Nov 2013 13:09

thanks

Basil

Thanks for lengthy message (as always). This is a Limited company and the owners do have a full time job as well.

While I do undertake the normal money laundering checks -not really possible to gauge a client full financial history (interested to know if other accountants do).   if I go indepth this may alienate my clients especially its not relevant with the direct filing of company accounts and Corporation Tax return to companies house.  I wish I could know everything about my client but its time and money as well.  Perhaps we are becoming ultra cautious incase we end up in trouble.  If a client is going to hide something it is so easy to do and sometimes you have to take it at face value.  Not possible to go through every entry on the bank statement.

The director do not file a tax return as they have no other income and of course do not pay a dividend. 

I did send a letter to the previous accountant with a clearance letter but they only sent me the TB, last year accounts and CT return.

I will raise the matter with the client of the continued losses and explain to them of the consequences of not filing the accounts and taxes correctly.  If they do not abide then will resign.

 

 

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By DMGbus
20th Nov 2013 08:51

Hobby trading and other income

Some clients (maybe the OP's in this instance) have a full time job  taxed under PAYE occupation to sustain normal living needs and do eBay trading as a pass-time with a vague hope of making a little profit.   Sometimes part-time activities are a hobby that develops into a trade.

If a "hobby" then losses are not useable for offset against other income, instead only against future profits of same hobby-trade.

If there is no other income (as in a job taxed under PAYE) I would ALWAYS be asking the client how they sustain themselves in the absence of profits.  Could be living off capital, could be accumulating debt (as in credit cards, overdraft or family loans).

Regarding Amazon potential profits, I wouldn't be surprised if the Gross Margins are very low such is the set up at Amazon that directs buyers to the lowest price, and once a modest GP is achieved then there's Amazon fees (15% x selling price I believe).    If the goods are coming from China then the cost will be goods + Import Duty + Import VAT (*).

(*) Unless VAT registered in which case import VAT recoverable but Output Tax payable on sales.

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