How To Detect If Client On The Fiddle?

How To Detect If Client On The Fiddle?

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Hi All,

This is a question for the entire community!

Can someone please explain to me and all members of the community who wish to learn, the best way to detect if a client is hiding transactions from his/her accountant in an effort to reduce their tax bill?

Maybe a client tries to hide how much money they are taking in, or maybe they make a mis-guided attempt by hiding their purchases, or whatever tactic they use, how do you go about detecting such activity for each tactic step-by-step.

Please provide thorough and easy to understand answers, we all wish to learn.

Thank you all in advance.

Gail

Replies (75)

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By cheekychappy
17th Feb 2016 19:49

You complete their tax return each year, and each year shows income below the personal allowance. 

However, they come to your office driving a Bentley and wearing a Rolex. To pay you, they pull out a massive wad of cash.

That's usually the easiest way to tell.

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Replying to SXGuy:
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By carlh
19th Feb 2016 09:21

what if

cheekychappy wrote:

You complete their tax return each year, and each year shows income below the personal allowance. 

However, they come to your office driving a Bentley and wearing a Rolex. To pay you, they pull out a massive wad of cash.

That's usually the easiest way to tell.

maybe his money comes from his trust fund. prejudice a lot are we, and very jealous you are.

 

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Replying to Jo Nokes:
Stepurhan
By stepurhan
19th Feb 2016 09:26

Realistic scenario?

carlh wrote:
cheekychappy wrote:

You complete their tax return each year, and each year shows income below the personal allowance. 

However, they come to your office driving a Bentley and wearing a Rolex. To pay you, they pull out a massive wad of cash.

That's usually the easiest way to tell.

maybe his money comes from his trust fund. prejudice a lot are we.

Maybe they are an eccentric billionaire as well.

Which scenario is more likely? Someone with a trust fund that clearly provides him a lot of money decides to run a business so small as to be hardly worth anyone's time. Someone actually running a successful business is hiding a significant amount of income and only declaring what they have to.

It's hardly prejudice to lean towards the massively more likely scenario (fiddling) until we know otherwise. Of course, if they answer the question "how are you paying your living expenses" they answer "I have a massive trust fund" that is a different matter. I think I'd want some proof of the existence of the massive trust fund though because, again, that will be the first thing HMRC ask for in an investigation.

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By Tim Vane
17th Feb 2016 19:58

I don't know many accountants who have a systematic method for checking on their clients. I suspect that most are like me, who tend to assume that their clients are honest, unless given reason to suspect otherwise.

If a client is not honest, then I think it's fairly easy for any experienced accountant to start to pick up on this. The numbers just don't add up, or the profitability just sets off alarm bells, or the client is defensive about certain questions. This usually stands out quickly, but you also have to remember that many clients are just a bit dumb, and not necessarily dishonest.

The more a client tends to hide things, the more obvious it is. At the end of the day, if a client is just not putting transactions through the books this will often have a knock on effect. So for instance, vehicle mileage won't square with the number of jobs done, and so on.

So no, I can't really offer up a checklist. And even if I could, I wouldn't, as it would just be a recipe for trying to cheat the system.

Why do you ask?

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Replying to Jo Nokes:
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By Gail
17th Feb 2016 22:03

Reason I asked

I have seen cases where I suspect the Takings have been reduced or the client has held back quite a lot of purchases. I think they are doing this thinking they can reduce their tax bill.

This is why I posed the question to the community. I had expected someone to say something along the lines of maybe using a Cash t/account for example, but I am not sure how that would work. Maybe the accountant would say ok we know you had this much cash in hand last quarter, because we did your vat, therefore if you had cash takings of x amount this quarter and cash expenditure of y this quarter we would expect you to have z cash in hand this quarter.

However, my guess falls down as clients don't tell you how much cash in hand they have at the end of this quarter when they hand in their vat documents, so I don't have anything to compare z to.

I was also thinking maybe certain ratios from ratio analysis could be used.

Surely an experienced accountant has figured this out :-(

Come on community, let's crack this!!!!!!

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Replying to Samantha20:
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By Cleggy1
19th Feb 2016 13:50

"Cases" - Surely Gail works for HMRC

Gail wrote:

I have seen cases where I suspect the Takings have been reduced or the client has held back quite a lot of purchases. I think they are doing this thinking they can reduce their tax bill.

There are fewer and fewer cash businesses around having the opportunity to fiddle. Even shops can have 70-80% going through card and with Apple pay it is likely to increase.

Plumbers have to report to Gas Safe so it is on record of how much work they do, landlords have to do landlords deposits. It is hard to receive cash without producing some sort of record.

But ultimately if a "case" wants to fiddle they will do and it is not up to the accountant to audit their records to ensure that everything is above board. I believe that all clients are honest HMRC believes all cash "cases" are dishonest.

Gail can you confirm your HMRC empoyment.

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Replying to Justin Bryant:
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By Michael C Feltham
19th Feb 2016 14:06

Not All of It:

Cleggy1]</p> <p>[quote=Gail wrote:

Plumbers have to report to Gas Safe so it is on record of how much work they do, landlords have to do landlords deposits. It is hard to receive cash without producing some sort of record.

Only where their work involves the gas supply...

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Replying to Justin Bryant:
By Duggimon
19th Feb 2016 14:27

LOL

Cleggy1 wrote:

 

Gail can you confirm your HMRC empoyment.

 

Aye, very good Columbo, HMRC have now taken to registering user profiles, waiting five years, posting the odd innocuous accounting question to throw off suspicion, all just to put their master plan into effect where they pump unsuspecting accountants for all the tricks of the trade by asking a really general question about a topic people are always happy to chat about.

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Replying to lionofludesch:
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By Gone Sailing
19th Feb 2016 15:21

Columbo

Duggimon wrote:

Aye, very good Columbo, HMRC have now taken to registering user profiles, waiting five years, posting the odd innocuous accounting question to throw off suspicion, all just to put their master plan into effect where they pump unsuspecting accountants for all the tricks of the trade by asking a really general question about a topic people are always happy to chat about.

I'd like to think you are right.

Whilst they surely have come to the wrong place for the tricks, it is the right place to elicit the average accountant's view of HMRC.

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By Tosie
17th Feb 2016 20:01

Standard of living

We can't hope to be able to identify all fraud but a simple method is to do an assessment of lifestyle. Mortgage etc how many children, what schools do children go to,holidays type of car.all things that can be obtained by a friendly chat and review of bank statements.

How does income compare with similar business.

We do not have the budget to cover everything and in my opinion we should not try to, after all we have either to trust the client or not act for them.

 

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By Tosie
17th Feb 2016 22:27

re reason you asked

The points you raise are standard practice and I cannot imagine any accountant  not reviewing ratios and carrying out cash balancing .I assumed from your op that you were looking at indepth investigation .

Thanks (1)
Replying to rajbulbul:
Red Leader
By Red Leader
17th Feb 2016 22:42

skimming

Anecdotally:-

I was told once that in a retail cash business, skimming 10% of the takings was normal.

Another time, another business, I was told that false purchase invoices had been put in by the owner.

In both these cases, the speaker was trying to talk up the apparently low profitability.

Before you ask, this was before the anti-ML law was introduced.

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Glenn Martin
By Glenn Martin
17th Feb 2016 22:37

Need more information

The most likely business to fiddle is a cash one, so things like chip shops, takeaways, corner shops eat all have a standard margin they should achieve otherwise they would require further investigation.

if he is smart enough he would suppress the matching amount of purchases as he would sales to give the correct GP.

If he has a till does he give you the z readings 

Have you visited his business, does it have staff does the wages paid out match the number of staff, what drawings do owners take?

there is a 100 ways some could try and fiddle the business.

 

There are many pointers to areas that could be wrong but you will need to give more information about it if you expect others to help you will have to elaborate on the details

 

 

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Replying to rajbulbul:
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By Gail
17th Feb 2016 23:01

More Info

Ok Glennzy, i'll try and create a scenario close to what I saw from memory.

Assume client is a chippy.

Lets say client has Total Takings (cash+bank receipts) = £100,000. Bank receipts = £80,000 (all sales). This means client has £20,000 cash available.

The client has Purchase invoices in this vat quarter of say £60,000 (excluding vat) which he mainly pays through bank, some paid through cash (not sure how much as this was not determined - i.e. exactly how much Purchases paid by cash).

However, and this is big, the amount of Purchases paid through the company bank account amounts to £80,000.

So, our suspicions are raised here because client is paying more through the bank for Purchases than they are declaring by Purchase invoices presented.

Assume there are no z readings (no till sheets) and there is no staff for simplicity.

How do you determine whether client on fiddle? Can t accounts help? How can you tell opening bank and cash in hand balances for the quarter?

Help!

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Replying to Not Anonymous:
paddle steamer
By DJKL
18th Feb 2016 10:30

@Gail

Gail wrote:

 

How do you determine whether client on fiddle? Can t accounts help? How can you tell opening bank and cash in hand balances for the quarter?

Help!

 

Before doing anything you prepare or correct or check  the cash account and bank rec together with analysis of bank/cash paid

Sometimes useful re the latter to set up paid book with columns:

Paid cash

Paid bank

Total

vat

purchases

etc

You do not say basis of vat records compared with books so a bit of guessing here.

If he is taking the somewhat annoying approach of having vat return records on input side as merely a list of invoices  by date and no books of prime entry (presume no purchase day book/purchase ledger/cash book?) then the only real sure fire way is to marry up the records to complete an imputed analysis of cash transactions .

Go through vat listing on the input side ticking off those transactions paid by bank, once bank reconciliation completed  input in those items that therefore must have been paid by cash. Where  bank payments made not within the vat inputs find out what they are for. Obviously if claiming vat on invoice date not paid date there may need to be some juggling with creditors to get books to marry up (input vat in returns to input vat in books) on a timing basis, though with a chip shop would not expect that much in the way of creditors either opening or closing.

Of course also look at bank lodged to ensure none of lodgements relate to anything other than banked sales.

You really cannot draw any firm conclusions until happy the books you are considering are themselves square; as cash transactions cannot really be reconciled you obviously first aim for the bank that can and then see how the cash transactions look from a common sense perspective.

There is certainly no one size fits all approach , the only rule I would suggest (As I learned to my cost during my training) is never to draw a conclusion until the evidence has been examined and checked.

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Replying to jdajames:
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By Gail
18th Feb 2016 13:32

Will have to re-read

Thanks DJKL. I'll have to re-read what you have written here tonight.

This section at first glance seems unclear ''Obviously if claiming vat on invoice date not paid date...''. 

Thanks for effort.

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Replying to paul.benny:
paddle steamer
By DJKL
18th Feb 2016 14:55

In effect possibly initially incomplete records

Gail wrote:

Thanks DJKL. I'll have to re-read what you have written here tonight.

This section at first glance seems unclear ''Obviously if claiming vat on invoice date not paid date...''. 

Thanks for effort.

What I was trying to say was the vat return may well list all the invoices within a vat return but they may not all have been paid within that vat period, they may be paid after the vat period, so if "reconstructing" the cashbook and agreeing it to the vat returns care needs to be taken re creditors. Matching them ought to (with care) highlight where there are differences-it could be as simple as something wrongly described within the bank/cash analysis or it might be something more sinister; the key imho is to keep an open mind until all the checks have been made.

Whilst not an approach where recovery of time cost is usually very satisfactory, if records come to you in such a condition you are a bit stuck-either point out to client likely time/cost  to deal with up front or if client will not pay then you need to walk  (I will not these days take on incomplete records unless really good reason-a client who say wants to improve record keeping and assisting him/her to a better place for instance)

My whole response revolves around how  (in what form/layout) the client is keeping records and what records he/she is keeping, I may have not really understood what you were saying but I got the impression that bank / cash analysis was either incorrect or poorly done or non existent.

As an example the old painful example of this used to be the dreaded simplex book where the invoices were all listed by quarter but tying the invoices up with the analysis of cash/bank paid was not always that straightforward. One way was to use the vat record like a purchase day book and the payments then posted to the deemed purchase control account ,but it might turn out somewhat unsatisfactory if the PLCA ended up with a debit balance at year end and one ended up trying to find which transactions were the problem; often one was better matching the vat inputs to the sums paid  but  that was not always straightforward if multiple invoices paid by one payment. (supplier statements used to be helpful)

The key is of course that the vat records needs to tie up with the bank/cash record but it can of course be a long and slow process getting this to work. On the plus point excel is much more friendly than doing the exercise using manual analysis pads, the approach a lot of us not doubt had to take in our youth.

Trust this makes sense- in effect if incomplete records to deal with first square up what is capable of checking to something external ( e.g.Bank rec) and then see if filling/ calculating the blanks makes sense- I always viewed these as doing a jigsaw where possibly all the pieces are not there and a fair bit of the picture is missing, if all the edges are there life is simpler.

I think only once a reconstruction  has taken place (books in a state to be reviewed) can one truly judge if the client is on the fiddle or merely incompetent at recording transactions.

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By Gail
17th Feb 2016 22:41

Cash Balancing

Tosie, can you give a brief on how cash balancing works? I mean, how would you be able to tell the cash balance at the end of the previous vat period if the client doesn't tell you? I can see how we are able to determine cash takings during the vat period as the client supplies this in his documents, cash expenditure we can also tell from bank analysis, but how do you tell the brought forward balance for cash from a previous quarter?

Am I missing something? Something is bugging me here.

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Glenn Martin
By Glenn Martin
17th Feb 2016 23:42

He is fiddling

Till receipts are part of source records and need to be kept.

HMRC will be all over it like a tramp on hot chips if he is not keeping then

if he has paid £80k to suppliers but only has £60k invoices your bank analysis should show which supplier has missing invoices. It could be he is marking cheque stubs with purchases when in fact the money is
going elsewhere.

Normally a cash trader would pay fish man cash and not throughh a bank so your setup seems odd for a fiddler as bank transactions carry more of a paper trail.

Also if you adding bankings + cash purchases to calculate sales for a Vat registered business you are on a hiding to nothing.

Takeaway margins are high in excess of 60% GP

so if he has £80k of purchases he will have slaes of £180k to £200k

Cash in hand figure if he doesn't tell you what it is a red hearing and will be no more than the till floats once he has banked for the week.

if you say sales are £100k he banks and has cash payments of £90k he should have £10k on 

hand but unless  you can physically verify the cash you are wasting your time in reality the cash on site will be £300.

 

the job just send like trouble from what you say and if he is not going to attempt to run it properly with balanced records walk away.

 

 

 

 

 

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Glenn Martin
By Glenn Martin
17th Feb 2016 23:42

He is fiddling

Till receipts are part of source records and need to be kept.

HMRC will be all over it like a tramp on hot chips if he is not keeping then

if he has paid £80k to suppliers but only has £60k invoices your bank analysis should show which supplier has missing invoices. It could be he is marking cheque stubs with purchases when in fact the money is
going elsewhere.

Normally a cash trader would pay fish man cash and not throughh a bank so your setup seems odd for a fiddler as bank transactions carry more of a paper trail.

Also if you adding bankings + cash purchases to calculate sales for a Vat registered business you are on a hiding to nothing.

Takeaway margins are high in excess of 60% GP

so if he has £80k of purchases he will have slaes of £180k to £200k

Cash in hand figure if he doesn't tell you what it is a red hearing and will be no more than the till floats once he has banked for the week.

if you say sales are £100k he banks and has cash payments of £90k he should have £10k on 

hand but unless  you can physically verify the cash you are wasting your time in reality the cash on site will be £300.

 

the job just send like trouble from what you say and if he is not going to attempt to run it properly with balanced records walk away.

 

 

 

 

 

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Glenn Martin
By Glenn Martin
17th Feb 2016 23:46

He is fiddling

 

 

 

 

 

 

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Quack
By Constantly Confused
18th Feb 2016 09:00

I'm guessing...

...Glennzy thinks he is fiddling

;)

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Replying to Hugo Fair:
Stepurhan
By stepurhan
18th Feb 2016 09:24

Are you sure?

Constantly Confused wrote:

...Glennzy thinks he is fiddling

;)

He's not being particularly explicit on the matter. :-)

Getting back to the question in general, there are no hard and fast rules. A client that is making poor profits might just be a bad businessman with overly generous wife/girlfriend/family to bail them out. This is where knowing your client beyond just the simply factual name/address/UTR details comes in. You need to have some idea of how someone is paying their day to day expenses, because it will be the first question HMRC will ask if they investigate. But, unless their explanation for this is completely implausible, there is no reason for you to take it any further. We are not HMRC and our job is to support clients, not go to great lengths to catch them out.

Anomalies in the figures presented, such as those in the scenario given, should also be queried. Again, this is because HMRC will ask such things. Whenever I ask clients questions that make it look like I think they are fiddling, I make it clear that it is better that I do it than HMRC will. If they have done something foolish, and are willing to rectify that, then I can do that without them suffering penalties (for current year stuff at least).

If a client is evasive with their answers, or refuses to rectify any issues discovered, then you show them the door.

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paddle steamer
By DJKL
18th Feb 2016 09:41

Normal body of proof is when he pays your fee in cash.

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By bernard michael
18th Feb 2016 09:59

Client has several members of his family who work in the business and are (in theory) paid cash totaling below the tax/nic limits.

Constant reference to man down the pub who gets away with certain expenses - why can't he 

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By AWEB Reader
18th Feb 2016 10:46

You are not paid to investigate clients. I can guarantee that you do not have a single client who has not at some time or other put a few pounds in their back pocket and not declared it, or, bought as TV and claimed it as a "computer" for business use. 

If you suspect a client is indeed "fiddling" then your only obligation is to file a report under Money Laundering Regs.  Beyond that you should do nothing as, by "investigating" you could well end up directly or indirectly tipping off the client. If he is fiddling and unknown to you is already under investigation you could find yourself accused of interfering with a criminal investigation. 

If you have a reasonable suspicion that your client is defrauding HMRC make a report and do nothing else.  Also, for your own protection, make sure you have a file with copy invoices or whatever detailing why you think he is fiddling.  

 You are not qualified or trained to investigate fraud - so don't do it. 

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By Gail
18th Feb 2016 22:59

Thanks. I have developed an idea of what you are saying.

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By B Roberts
19th Feb 2016 10:23

Interesting
These threads are quite common - I find them interesting (as an accountant who trained and has always worked in industry).

I wont insult anybodies intelligence by pointing out that in this scenario the accountant is not engaged to perform an audit, and other than asking obvious questions when something doesn't quite look right, what can/should the accountant do ?

This is the point where people suggest disengaging the client, but why ? (I guess it depends on their own personal moral judgement - not to mention the ability (financially) to do this).

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By bumpdinkwhallop
19th Feb 2016 10:59

Nominal unlikely to notice

It really does become apparent when someone is some is at it. 

A hairdresser on the flat rate scheme with gross sales of £86k and £112k in actual cash outflows. Never mind the cash outflows why would you not reduce trading slightly and deregister!!

Gross profits of 30% for take away cafes, pubs with 35% gross profits. Taxi drivers with £28k detailed in there dailly books but £40k going through the personal bank account are always good indicators. Obviously there are many valid reasons but it always raises the question with me.

Nominal understatements might not be apparent but wholesale (kicking the [***] out of it) is normally easy to pick up on.

I dont know if it would be different with bigger entities that can have accounting or tax professionals helping them evade but very generally its fairly easy to see when my type of very small clients are at it! 

Do people here move to report straight away or do they tackle the issue head on and confront the client???

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Replying to johnjenkins:
By Duggimon
19th Feb 2016 11:19

You can't

bumpdinkwhallop wrote:

It really does become apparent when someone is some is at it. 

A hairdresser on the flat rate scheme with gross sales of £86k and £112k in actual cash outflows. Never mind the cash outflows why would you not reduce trading slightly and deregister!!

Gross profits of 30% for take away cafes, pubs with 35% gross profits. Taxi drivers with £28k detailed in there dailly books but £40k going through the personal bank account are always good indicators. Obviously there are many valid reasons but it always raises the question with me.

Nominal understatements might not be apparent but wholesale (kicking the [***] out of it) is normally easy to pick up on.

I dont know if it would be different with bigger entities that can have accounting or tax professionals helping them evade but very generally its fairly easy to see when my type of very small clients are at it! 

Do people here move to report straight away or do they tackle the issue head on and confront the client???

You can't make a report based on the indicators you describe, they indicate something is probably wrong with the figures but not necessarily that there's anything morally or legally wrong going on, most of the issues we have with clients' books that look like that stem from idiot clients rather than any attempt to mislead.

Always query the client first, take their explanations for the problems and you'll have a far better idea from there whether it's prudent to report or disengage.

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By cheekychappy
19th Feb 2016 11:07

How do you know whether there is anything to report if you don't ask the questions?

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By bumpdinkwhallop
19th Feb 2016 11:43

Good feedback

The £86k above was a serve understatement, clearly. As Annual VAT had been filed and paid 5 months previously the client agreed there was a mistake with the sales figures. These where restated, vol disclosure filed, actual turnover included in accounts and CT return. Disaster averted.

The reason i asked the question was i remember a number of years ago when the new MLR regulations kicked in attending a HMRC MLR classroom based traiining. They had an officer from SOCA as it was then known do a talk that quite honestly left me worried incase i made a mistake. He was leaning towards everyone is dishonest and if you dont report all hell will break loose for YOU. Honestly i was doing what the OP was asking....... wasting time for looking for things that never exsisted.

I done another classroom based training at lexis nexis in London and the head of HMRC MLR for the UK gave another talk and a senior tax partner from one of the mid tier firms in London challenged him for his narrow view of the legislation and that they were scare mongering. Experience is defo valuable.

Thanks for your comments

 

 

 

 

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Stepurhan
By stepurhan
19th Feb 2016 11:49

Innocent explanations

Never attribute to malice what can be explained by stupidity.

I knew a client once that recorded his purchase invoices when he received them to remind himself they needed to be paid. He'd then record the payment as well. Result, a doubling of many expenses through stupidity. (He accepted his error immediately on having it pointed out to him and amended his record-keeping arrangements without question)

Why would a client not reduce trading slightly to deregister for VAT? Because the thought had never occurred to them (though the accountant should have pointed that out). Because they have regulars who like them open all week and don't want to risk upsetting them by not being open all the time. Business decisions are not always made for rational reasons. For that matter, if they are not gaining from being registered, wouldn't a fiddler just declare income below the limit? After all, VAT registration just gives HMRC another reason to look into the business finances at some point.

If the evidence of fiddling is right in front of you, it is more likely to be stupidity than outright fiddling. A serious fiddler won't show you the personal bank account with £40k of undeclared income in it. If someone passably intelligent is really on the fiddle, then not understanding how they are paying their day to day expenses is really the only way of spotting it.

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By oldshoremore
19th Feb 2016 11:54

It all ends up in tears: a question of when

We had a lovely chippie client with a nice family in a local school and accounts which showed the right ratios and the drawings commensurate with lifestyle. HMRC were checking his supplier's sales invoices for another reason but correlated my client's purchases with their sales.

It transpired that the local Mr Big, his landlord, had coached him to provide a cash rent on top of his cheque- paid rent by suppressing sales and purchases in the correct ratio! Mr Big eventually fled leaving a Ferrari on Liverpool docks as a consolation for the Enquiry Branch inspectors......

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By petestar1969
19th Feb 2016 12:07

Gail (OP)

Do you work for HMRC?

Some of your questions are strange.

How would leaving out expenses reduce a client's tax bill?

A client is more likely to inflate their expenses rather than leave out income to reduce their profit.

 

 

 

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Replying to Wilson Philips:
By cheekychappy
19th Feb 2016 12:13

Unless

petestar1969 wrote:

 

A client is more likely to inflate their expenses rather than leave out income to reduce their profit.

A mortgage application is around the corner.

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Replying to BryanS1958:
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By petestar1969
19th Feb 2016 12:40

Err

cheekychappy wrote:

petestar1969 wrote:

 

A client is more likely to inflate their expenses rather than leave out income to reduce their profit.

A mortgage application is around the corner.

 

Sorry fella, but that's not relevant to the thread.

 

The OP was suggesting that a client might try to hide purchases in an attempt to reduce their tax bill. Clearly, that would not work.

 

To answer her question, I was suggesting a client was more likely to inflate expenses instead of hiding income to reduce their tax liability as its easier to make something up than leave something out (especially if the client is a CIS-registered sub-contractor).

 

Cheers

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Replying to vinylnobbynobbs:
By johngroganjga
19th Feb 2016 13:10

Misguided

petestar1969 wrote:

The OP was suggesting that a client might try to hide purchases in an attempt to reduce their tax bill. Clearly, that would not work.

I think you missed the word "misguided" in the OP's explanation.  Misguided precisely because it would have the opposite effect from the one intended. 

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Replying to kevinringer:
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By petestar1969
19th Feb 2016 13:44

John

johngroganjga wrote:

petestar1969 wrote:

The OP was suggesting that a client might try to hide purchases in an attempt to reduce their tax bill. Clearly, that would not work.

I think you missed the word "misguided" in the OP's explanation.  Misguided precisely because it would have the opposite effect from the one intended. 

 

I didn't miss anything, was just trying to keep a thread which should be dead continuing..

 

All clients fiddle, and everybody lies (quoted from House).....end of.

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Glenn Martin
By Glenn Martin
19th Feb 2016 13:10

To Pick up on B Roberts point.

Our obligation is to prepare the accounts based on the records, information and explanations giving to us.

If the client is lying git then ultimately its his worry, he signs the accounts and he approves his tax return.

We have to take steps to point out areas that look wrong but if he explains it away then that will be his problem when it goes wrong.

The reason i would look to dis engage from the type of job mentioned above is that it ends up becoming a thankless task, and eats up to much of your time

Someone who is using sales as balancing figures for VAT returns is just building up a time bomb as when it is looked into after several years the VAT and penalties payable will wipe them out and you wont get paid.

This is not a guy who withdraws £500 petty cash but only has £300 worth of invoices for it, the figures are 000's each quarter.

I would maybe spend a few months getting him to get things in shape if he shows no intentional of improving his records, keeping till receipts, cash books or even keeping things in order I would look to move them on. 

 

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By cheekychappy
19th Feb 2016 12:52

Err cocker, it is relevant to the thread.

Given the OP’s naivety in this area, they should be made aware that fiddling accounts and tax can work both ways to achieve different outcomes.

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By Chris Ash
19th Feb 2016 13:08

On the fiddle

If they have a cash business of any kind then it would be very naive to assume that some of that cash doesn't find its way into something other than business expenses. It's the degree of cheating which it makes it obvious to their accountant and HMRC.

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By Michael C Feltham
19th Feb 2016 13:12

In Reality...

You cannot.

If the client is shrewd enough and well practised in the art...

As an italian gentleman explained to me many years ago, he kept four sets of books: one for himself to know what actually happened; another for his accountant, being what he suggested actually happened; one for his partners, showing - you can guess the rest! And one for the Italian Tax Authorities, etc.

Most fiddlers are caught by a whistle blower.

As one real example (not my client; I knew him however, and met him soon after he had been nicked!).

The man a number of successful small restaurants. In high season, his top earning site ran two tills! He most carefully balanced his declared takings with his declared raw foods etc purchases to achieve an acceptable GP and NP. Often buying goods for cash instead of using his many accounts.

A disgruntled ex-member of staff snitched to what was then IR.

And the inspector quizzed him and at the critical point, took the dodgy till roll from his desk draw and asked "Well how, Mr X, can you explain this, please?"

Collapse of stout party....

I used to act for many public house clients, some very substantial. Once VAT was introduced, HM Customs had "spotters", logging car index numbers at cash and carries, noting suspected pub landlords buying alcohol for cash: since tenant landlords, in particular, operated two tills. Again you can guess the rest.

Skimming cash is probably the hardest evasion tactic to both suspect, but more critically, prove in law.

Consider the famous case of Han and Yeu.

http://www.taxation.co.uk/taxation/articles/2001/01/25/793/human-rights-...

In essence, accountants do not possess a crystal ball, sadly: I did, however it exploded from overuse many years ago!

We are not omniscient, and despite MLR 2007, cannot enjoy expectations of same.

Clearly, we might only apply "All due diligence" and "Every best advice" and similarly to our clients, sign off work "To our best knowledge and belief".

 

 

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By stacksbookkeeping
19th Feb 2016 13:22

Or you could just...

ask the bookkeeper! ;)

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By DJKL
19th Feb 2016 13:26

Hiding purchases can work, to a point

I had a friend years ago who was a freehouse stocktaker, this was circa  early 1980s. He had recently started using a stocktaking machine (computer-of sorts), I think called a Husky. Anyway purchases etc all punched in plus sales and the thing spewed out analysis. After a few months use started seeing some odd patterns re ratios of different types of purchases re one customer, ratio of vodka purchases to whisky was odd, but not something under old manual stocktake system that would previously have really been analysed.

Of course it turned out the bar manager was buying in vodka himself (invoices not going through) and under ringing equivalent sales with appropriate margin so no impact on overall GP%, but as a crook he was lazy and not spreading the undeclared purchases, he just used vodka; but of course the net result of under declaring purchases is to allow (disguise) under declared sales.

HMRC certainly take the point, I dealt with a back duty in the dark ages where HMRC asked for printouts from cash and carry our client used (burger van) to ensure all purchase invoices through books (no sales suppression); of course client might (if smart/ cute) have been using more than one cash and carry!!!!!

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By Jack the Lad
19th Feb 2016 13:31

Fiddling clients ?

Whilst I agree with the philosophy that we do not carry out an audit on unincorporated businesses, it is surely our duty to ensure that the accounts we produce are a fair and reasonable reflection of the trading of each business -- this is as much in the client's interest as HMRC's.  Any "deviation" from the norm, which will be different for each business, obviously depending on so many factors, but can be ascertained relatively easily, should be pointed out to the client, and an estimate of the additional costs involved given and hopefully accepted to enable you to proceed.    After all, should there be an Enquiry by HMRC, it is you who will have to explain your figures, and maybe held liable for any errors or mistakes.  Don't forget that HMRC have their own history of ratios, and are always looking at cash businesses.

 

Here is a simple initial checklist I use, possibly summarising all the answers so far:

1.  Look at ratios, eg Purchases: Sales; Gross Profit: Sales; 

2.  Check the clients costing methods, ie Mark-up on costs, which will also give an idea of the "normal" Gross Profit %.

3.  Ask the client if he has included all takings.  

4.  Ask him about his living expenses, and do a simple cash account.  This will often reveal if any takings have been omitted.

5.  If these simple exercises reveal discrepancies, prepare what you consider to be a reasonable Income & Expenditure account, and point it out to the clients, then ask question 3 again!  

6.  Don't forget VAT !

This has stood me in good stead over the years (I am probably older than "Greying old accountant" who regularly posts here!), especially when I have had the odd Enquiry, even more so when I have taken over a new client as a result of an Enquiry.

Good Luck!

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By The Accountant
19th Feb 2016 13:58

Cost of Living

Doesn't anybody ever do a cost of living exercise any more?  This was drilled into me when I was training and I still do it for each client today some 40 years on.

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Replying to lionofludesch:
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By bumpdinkwhallop
19th Feb 2016 14:19

This is interesting

The Accountant wrote:

Doesn't anybody ever do a cost of living exercise any more?  This was drilled into me when I was training and I still do it for each client today some 40 years on.

#

Do you really do this?? Is it for tax planning or to see if the client is at it?? Iv actually never heard this before if its to see if they are being compliant

How detailed is the exercise and generally what does it involve??

40 years ago sounds like the old black & white days too me as its a while before i even hit the big 40!! I have no idea really what happened before self assessment even.

Was 40 years ago before CGT and if so was the attempt to turn income into capital back then all the rage??

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Replying to adf2410:
By Duggimon
19th Feb 2016 14:32

We do them too, occasionally

bumpdinkwhallop wrote:

The Accountant wrote:

Doesn't anybody ever do a cost of living exercise any more?  This was drilled into me when I was training and I still do it for each client today some 40 years on.

#

Do you really do this?? Is it for tax planning or to see if the client is at it?? Iv actually never heard this before if its to see if they are being compliant

How detailed is the exercise and generally what does it involve??

 

It's good practice because HMRC will do it if they investigate so best you do it first. If the client is living a lifestyle that the accounts don't support then you know something is wrong. We always approach it from the point of view there may be mistakes rather than they may be deliberately understating but either way if there's a problem then better we find it than HMRC.

Basically all it involves is adding up all their expenses for a year, mortgage, cars, bills, food and whatnot and checking the total is less than or equal to their total net income. If they spend more than they make then unless they're running up huge debts you know there's more money coming out the business than you have recorded.

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By Dib
19th Feb 2016 14:01

I don't think Gail is HMRC employed.  When I was in the Inland Revenue as it was then I could always tell when a taxpayer was lying - I could see his lips moving!

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