HMRC VAT visit

HMRC VAT visit

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My client is a company providing training services. HMRC are calling soon to review last 3 years returns. Client has made two revelations to me at this stage.

1. He does not have invoices / receipts for all input VAT. Items were reclaimed from bank statements throughout that period.

2. He had a company bank account with another bank which is undisclosed for VAT and for Corp Tax. Approx £30k income each year and £15k expenses.

In fairness this guy is on his own with £250k turnover. And with several family problems and parents with terminal illness needing care, he should have engaged a bookkeeper or got us to provide such services but he didn't and was swamped.

It seems to rank as careless despite the circumstances. But how should i handle the VAT visit? And what will the likely penalties be?

I am advising full and frank declaration with calculations prepared in advance of HMRC and these be provided to officer at outset. Any other comments?

Many thanks folks.

Replies (19)

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By User deleted
05th Jun 2015 07:12

Make an unprompted disclosure and correct the VAT returns: may be the net VAT impact is less than £10k or in any case between £10-50k. As regards no receipts for payments made through bank, explain the circumstances and leave it for the inspection party to respond first. 

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Replying to lesley.barnes:
By JCresswellTax
05th Jun 2015 09:14

I didn't think it was possible

taxguru wrote:

Make an unprompted disclosure and correct the VAT returns: may be the net VAT impact is less than £10k or in any case between £10-50k. As regards no receipts for payments made through bank, explain the circumstances and leave it for the inspection party to respond first. 

To make an 'unprompted' disclosure once an enquiry had been opened by HMRC and that all disclosures in these circumstances would be 'prompted'.

Have I misunderstood?

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Stepurhan
By stepurhan
05th Jun 2015 09:05

All careless?

Not having receipts for all the input VAT is every-day carelessness. A lot of business owners, too busy with what they do for a living, fail to keep track of the paperwork. It is probably worth trying to get copy invoices off the larger suppliers where you have gaps here. If nothing else, that shows a willingness to rectify the problem.

But on what basis are you saying opening a second bank account careless. Is there a sound commercial reason for opening the second bank account, or is this purely hiding income with some hiding of expenses to avoid distorting the accounts. For that matter, what are these £15k expenses? Is it possible these are subcontractors who were happy to work cash in hand on the undisclosed jobs?

That may seem an overly cynical view, and there may well be mitigating circumstances. But if there are you need to be certain you can back those up. HMRC are unlikely to look kindly on this, and may even seek prompted disclosure penalties, on the basis the VAT visit prompted your client coming clean. I'd argue against that (prompted disclosure should only be "we've found something wrong and encourage you to help us quantify it", which is not the case here) but you are definitely on the back foot.

 

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Stepurhan
By stepurhan
05th Jun 2015 09:50

Enquiry or visit?

I was assuming that this was a bog-standard VAT inspection (i.e. a simple check to see all is in order). Hence mine (and presumably taxguru's) argument that any disclosure before the visit would be unprompted.

If it's an enquiry, where HMRC either suspects or knows something is wrong and is actively looking for it, then you are already in prompted territory.

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By JCresswellTax
05th Jun 2015 09:56

Thanks

That's interesting.

But I can't help but feel HMRC are likely to argue prompted on the basis that you are now only making the disclosure as a result of them contacting you.

Not saying I wouldn't argue the point but unsure how successful it would be.

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Replying to mumpin:
Stepurhan
By stepurhan
05th Jun 2015 10:14

Definitely tough

JCresswellTax wrote:
That's interesting.

But I can't help but feel HMRC are likely to argue prompted on the basis that you are now only making the disclosure as a result of them contacting you.

Not saying I wouldn't argue the point but unsure how successful it would be.

Depending on how the money has wound up there, it is possible that a simple VAT inspection would not have turned up the second account. I agree that is a shaky basis for claiming unprompted disclosure, but it has to be worth a try.
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By mrshamilton
05th Jun 2015 11:27

We had a PAYE inspection and used the occasion to declare an unreported benefit, it was counted as unprompted as it didn't relate to why they came in the first place.

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Replying to DJKL:
RLI
By lionofludesch
06th Jun 2015 13:29

Agree

mrshamilton wrote:

We had a PAYE inspection and used the occasion to declare an unreported benefit, it was counted as unprompted as it didn't relate to why they came in the first place.

The PAYE ladies came to visit a client company and the first thing they did after getting their coffee was to offer an opportunity to disclose. Saves everyone time but if there's to be no reward for the trader, why would he do it ?

Posters above may have the manual on their side but that's not necessarily what happens.

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By bernard michael
05th Jun 2015 11:32

I would get the VAT inspection postponed until you are ready with all necessary paperwork and make a disclosure before the postponed visit. Also I would be in attendance at the visit so that you can record what b******t the client comes up with in answer to the obvious questions.

EG Why did you not declare the VAT, why do you have a separate bank a/c.

The family problems will not be accepted as a reason for 3 years of fiddling and deliberatlely undestating his vatable turnover

Bear in mind once the VAT disclosure takes place an investigation into the Corp Tax situation will probably ensue. So I'd be ready for that with another disclosure

Good luck you'll be in for a lot of work (unpaid?)

 

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By User deleted
05th Jun 2015 11:52

Agree @stepurhan and JCresswellTax

A disclosure is 'unprompted' if made at a time when the person making it has no reason to believe that HMRC have discovered (or are about to discover) the relevant act or failure. Otherwise, it is 'prompted'

My terming it 'unprompted' is based on the argument that unearthing an undeclared bank account could be well outside the reach of a routine VAT visit, and HMRC would not be discovering it without the client voluntarily coming forward. Whether or not the argument stands, for the client it is indeed an unprompted (genuinely) disclosure, and they should stand by that argument. HMRC generally welcome unprompted disclosures but sometimes argue that once a visit is diarised they would discover any thing. Cases like UEGF [2013] UKFTT 292 (TC) (thought not very relevant to the OP's case) could also be unhelpful for the client.

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Out of my mind
By runningmate
06th Jun 2015 11:42

Careless, really?

It seems to me that the carelessness of opening a second bank account in the company name & putting selected receipts & payments through it for several years without disclosing these to the external accountant or anyone else ranks alongside that of the Hatton Garden safety deposit box thieves who carelessly drilled through an 8 foot thick concrete wall underground in order to access the boxes!

You are havin' a larff ain't ya?

RM

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Kieran Phelan
By KPEM online
06th Jun 2015 17:57

Thanks.....
Thanks everyone for your advice. Useful info and food for thought.

I know the client well enough to know he is honest but very careless in terms of his books. He does want to clear this up no matter what.

The second account was opened for merchant services but due to the stress of dealing with death of and caring for teminally ill parents over several years and at long distance he has not remembered to provide the info to us. He had more pressing matters to attend to and just repeated what he gave us each quarter/year without thinking.

It seems that the "expenses" in the merchant account are probably tranfers to the main company account and these may have been already treated as sales for VAT and CT purposes. So thats a bit better for him.

Full analysis and disclosure will be made and hopefully we can argue unpromtped. Worth a shot.

I think its unfair to call someone an outright thief without knowing the client or full facts. But I guess everyone is entitled to their opinion these days, no matter how ridiculous or unnecessary.

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By why always me
08th Jun 2015 11:31

careless!!

I am all for supporting our clients hour of need, but how this second account is going to be viewed as anything other than parallel trading is beyond me. The fact that NONE of it goes through the books to me you will be lucky not to be forced down the cop9 fraud route once all agencies are informed. 

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By geoffwolf
08th Jun 2015 11:52

pulling wool over the eyes

KPEM

It seems to me that you have been used. As soon as an outside agency becomes involved your "honest" client now wants to protect himself. I suggest you politely read him the riot act and get a substantial amount of fees up front for dealing with the disclosure and its ramifications if you feel you have the necessary experience.

By the way, what type of activity are the client training their clients for?

 

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By janefg
08th Jun 2015 12:49

Did the client know what he was doing?
How did you find out there was something wrong with the client's records and about the second bank account? If the client had forgotten about all this or was careless, how has it come out with the threat of a VAT visit?

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By Ammie
08th Jun 2015 13:17

Apologies Your Honour It was An Oversight!

Careless?

From the limited information I read into it as deliberate concealment. I hope I am wrong or your client can prove beyond doubt that it wasn't.

I also hope your client is one of faith as they will need "gods" helping hand should a sharp minded inspector be on the case. On the other hand, should it be tantamount to an easy day out of the office for a rookie your client might be spared the severe emotional pain which may come.

In any event, full disclosure should be made without further ado, not to mention the money laundering and associated reporting implications.

 

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Kieran Phelan
By KPEM online
08th Jun 2015 20:48

points taken
I have met the client again and advised on immediate disclosure. This chap is just so ridiculously quiet its hard to know where i stand. He has the same expression based on news of a lottery win and death of family member. His lack of knowledge and understanding of the seriousness of the situation is worrying.

But regardless it is impossible to argue carelessness. At some point careless becomes reckless and this is well into that territory now.

What are the chances of criminal conviction or prosecution? Does it depend on level of evasion or taxpayers behaviour?

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By Tim Robinson
09th Jun 2015 10:11

Partial Exemption?

I had a private sector training business client who received a lot of government money to put the unemployed through specific training courses and they were partly-exempt.  Might this be the case with your client?

(Obviously completely off-topic with regard to the disclosure issues)

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By Ammie
09th Jun 2015 10:59

Poker Face?

I would ask him straight about his actions and the events and allow him to explain what his purposes were. If he is cagey, vague or side stepping the point I would be uncomfortable with him and his motives and more importantly whether I was being manipulated as a scape goat. If there is a reasonable explanation then proceed to resolution with HMRC.

Maybe I am being over cautious, but that is a safer route than having to be confronted with sensitive questions during times when agents are coming more into the spotlight.

I am not suggesting any drastic move like resigning etc but I would certainly take firmer control and even formally write to him explaining his statutory obligations, the repercussions of "errors" and making your concerns clear .

Whether there are mitigating circumstances is peripheral if his actions are questionable.

Of course, the materiality of the transactions could add serious gravity to the circumstances. If not material then the financial repercussions will be less severe and would make resolution much easier.

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