I have a client who's business has gone into liquidation owing HMRC £ tens of thousands. He has formed a new company and trading is virtually seamless.
I am not excited about acting for the new company. Should I show a bit more emotional intelligence and get on with it or would others have similar reservations?
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You're his accountant, not his priest.
My only concern would be ensuring that I was paid in advance to ensure I never became a victim should he do it again.
depends
If he is using the old company's trading name and equipment, etc, has he bought this from the liquidator? If so, this is what the insolvency legislation permits, it recognises that businesses go bust. If no liquidator appointed to the old company, then yes it might smell a bit. There has to be some sort of arms-length market value transaction between oldco and newco.
Regarding not being his priest...
... post April 2013, you will need to consider how continuing to act sits in the context of Schedule 38 FA 2012. Refer in particular to para 3(7)(b).
Morals v Law
Steve there is no suggestion of dishonesty in the OP's question. Assuming all the legalities have been complied with there is no suggestion of dishonesty by the client, so sch 38 has no relevence.
The OP seems to be concerned with the moral implications which is an entirely different consideration.
Even meddling governments can't legislate for morals. I know some have foolishly tried but, in business, if it's legal, then it's acceptable and if you don't do the client's accounts, someone else will.
Morals are a luxury which some can afford, and others can't.
If you feel uncomfortable...
... follow your instincts. I always do. It may not be commercial but I prefer to deal with clients I like, admire or trust and not those which may be be trying to deceive, are always challenging my view or want to push everything to the legal limits and sometimes beyond. I'm happy that way and it is a luxury I am fortunate enough to be able to afford.
Contract
For those clients I always ensure in the LOE/Contract has a clause which makes the directors personally liable for any monies owed should the company be unable to settle the debt.
As an example I act for clients who in 1989 were being forced into liquidation by their bank for the net sum of £3500. As the business was sound I organised a phoenix. The new company reached £3million t/o and a profit of £400000 after many years of successful trading. I then arranged a trade sale for the owners,whose gratitude through the intervening period proved very rewarding.
The moral is if the legalities have been properly carried out you shouldn't have a problem in acting.
The Americans have a saying that there is no failure in failing only in giving up. So give the client the benefit of the doubt .
Here endeth this lesson
If it's legal, then it's acceptable
Not disputing the substance of this argument, but at the same time how would people feel about it if it was them that was owed tens of thousands? (Actually, seeing as how we're all investors in UK plc, that is the effective position).
Anyone who advances credit to a limited company should be aware of the risk and make sure it's contained and minimised . If HMRC collection procedures are lack - tough. They're just another creditor iin the risk game
Tax liability
Out of interest, how did the company end up owing thousands to HMRC? Is it unpaid PAYE, Corporation tax, VAT?
Youi're correct in that HMRC
Youi're correct in that HMRC didn't advance credit but rather allowed it. However once aware of how much is owed they should have been as stringent in collection procedures as a trade creditors would be
If they didn't allow it it wouldn't exist. Perhaps to be semantically correct I should have said be aware of instead of allowed. I hope that the OP is happy with the responses to his morality problem
No I have good and bad dealings with HMRC in whom some staff are very good at their job and care about the results of their actions. One in particular I can name as being excellent in this context is the Insolvency dept in Worthing (strange though it may seem).
If the client deliberately tried to avoid the VAT due then morality comes into it (maybe). If however it was a mistake or error and not deliberate then I keep to my position. What is certain is that if you don't act for the client someone else will and where do you draw the line. eg Is a client trying to squeeze a little bit of entertaining into their allowable expenses OK or not
Ethics & Money
Per two postings above "if you don't act for the client [do the client's accounts] someone else will" can't find that justification in the ACCA's ethical handbook, Socrates is turning in his grave.
Under the circumstances you set out, per Red Leader, unless the new company has paid the old one a market sum for the business and I was happy the VAT underdeclaration was not deliberate or reckless, I'd not act for them. It's a personal thing.
HMRC's fault ?
Sometimes HMRC really do act rather stupidly.
They do push taxpayers into bankruptcy too quickly.
For instanbce in this case, had they come to an agreement that the company would pay it's proper VAT in future, and, allowed it to clear the unpaid VAT over a realistic period of time even if that period was 10 years, then eventrually the treasury would have got it's money.
Instead by no doubt demanding immediate payment, or at best, arrears cleared in no more than 6 months, they have pushed the company into liquidation, and received nothing.
I can't really blame the directors for forming a phoenix company and putting two fingers up at HMRC given my client's experiences of HMRC's inflexible and pointless approach to time to pay agreements.
"Is 10 years realistic?"
The OP says the company owed "tens of thousands of pounds".
My point is even if it takes 10 years, HMRC are getting £x thousand per year back.
By forcing them into bankruptcy HMRC gets precicely nothing back, and, probably puts employees onto the dole thus costing the taxpayer even more.
It seems a very simple decision to me.
The other side of the coin
In 10 years ... the tens of thousands may have turned into hundreds of thousands.
In my humble opinion ... some people should not be allowed to have limited liability companies .... but I am not saying that is the case here.
Advantage.
"Aren't they getting an outrageously unfair competitive advantage over other local businesses? "
Agreed, but until directors are made personally responsible for business debts nothing will change, and of course making them personally responsible would, in effect, defeat the whole point of limited company status.
Perhaps the solution is to make directors deposit a sum of money equal to, say a year's likely taxation, in some central holding fund before they are allowed to form a limited company. How such a system could be policed I have no idea.
The problem is that it is too easy to form a limited company. 10 minutes online and £20 on your credit card is enough - far too easy.
While my client was blissfully ignorant about their wrong-doing the company was 'profitable', dividends were taken, mortgage paid, no personal debt. The only loser was the public purse.
Sounds to me like fraudulent preference against HMRC. Were the directors happily paying themselves whilst the HMRC debt buit up. If so it is possible the liquidator will demand the money back to pay all creditors equally. They may go further and send a detrimental report on the Directors actions which could lead to a disqualification order aginst them However I this is unlike ly if the debt is only £10000 ( is this the true extent of the creditor position?)
Hit squad
Andy, surely if we take up this idea, the Treasury will set up a company director hit squad, who will also have responsibility for eliminating retired public servants whose pensions are becoming onerous.
Perhaps I'm watching too many movies.
Sad to say I believe that I have a client
who is 100% shareholder in a Company which is not up todate with VAT and the Co owes considereable sums for Corp Tax but has no money because of excess "drawings" by the directors. The Company is no longer trading but awaiting for Companies House to strike it off.
This set of answers has helped me in the thought process as to what to do next. MLR is my main concern. Can any one help me to determine when I should put in a report. As I see it until the Company is struck off it is a wait and see but after striking off do I have to make a report because of the unpaid taxes and do I need to report both the Company and the directors?
Paul It is almost certain that HMRC will object to the striking off and probably liquidate it. Tne actions of the directors will then be the problem of the liquidator. In my opinion unpaid taxes and overdrawn DLAs are not a matter for MLRs or we would all be spending our days submitting them.
But will they?
I agree with bernard that, in an ideal world, HMRC will monitor & object to any sttrike off application on a company with out of date tax affairs, however in recent years thousands of such companies have vanished each month without HMRC intervention purely I think because they haven't the resources to monitor them.
In these circumstances therefore where a director has deliberately allowed the company to be struck off in order to gain a financial advantage it might well be a ML issue. I hope others more experienced in this can comment.
MLR Checklist
Reason to suspect, TICKobtained in professional capacity, TICKthat the person:is in possession, orhas obtained, TICKthe proceeds of a crime:proceeds, from a TICKcrime. ???