Cornwall tax trial: Lessons for accountants

David Winch has spent most of the last three months in the Crown Court listening to prosecution evidence concerning Simon Pearce, an unqualified accountant charged with defrauding his clients and the Revenue of £2m in tax. Below, he sets out his lessons learned from the experience, following on from his initial blog post:

So, what did I learn from this long trial which is of particular interest to accountants acting as tax agents?

He should have expected an HMRC visit 

Firstly, it should not have come as a great surprise to Pearce when HMRC officers arrived in force in May 2011 and searched his office, taking away boxes of documents including his client files and clients’ records. 

Pearce had a very long history of problems with HMRC prior to that.

There had been numerous...

Continued...

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Comments
BKD's picture

Excellent summary, David    7 thanks

BKD | | Permalink

I'm sure I speak for many others in thanking you for taking the time to write this - it should certainly make the cowboys (not that I expect too many of them to be AW members :¬)  ) sit up and take notice.

memyself-eye's picture

This guy hardly deserved

memyself-eye | | Permalink

to be called an accountant.

But why did it take HMRC TEN years to bring him to book?

He didn't even deserve to be

vodkaqueen | | Permalink

He didn't even deserve to be called a bookkeeper.  I was 'only' a bookkeeper for many years but even then I was able to tie up end of year stuff properly for my accountant colleagues on the more straightforward Self Assessment accounts and tax returns.  Claiming FYA for cars?  Come off it.

David,

darrenwilliams | | Permalink

David,

Out of interest did the clients ever receive accounts, that they signed and returned to the accountant? (thus seeing the expenses figures etc)

Just interested to hear whether the clients were potentially aware of the over claiming of expenses or did they not receive any form of accounts from the accountant?

Thanks Darren

 

He has damaged accountants reputation    5 thanks

Samantha Perkin | | Permalink

I have inherited clients from him. What has been missed is that he had a large office with other staff including people who must have known. These people are now trading again.

Darren,

kewcumber | | Permalink

Darren,

I work on some micro businesses - they do all get accounts from me and I also try really hard to make sure they understand what they're signing but its an uphill struggle.  It doesn't surprise me at all that his clients didn't have a clue what their expenses were.  Their lack of knowledge may be down to him or themselves!

 

I certainly wouldn;t be adding costs for them myself - I might query whether they have given me everything if their numbers look low but taking it oupon yourself to put in different numbers than your clients have given you seems a recipe for disaster.  Which is a bit of a pointless statement given the outcome!

davidwinch's picture

Clients knowledge of their own accounts    1 thanks

davidwinch | | Permalink

Darren

Yes clients did typically see, and sign, a Profit & Loss Account.  How much notice they took of it is another matter.  This is illustrated by the sort of Q & A we saw a number of times in the witness box.

Q "Mr Bloggs please look at this document which is your Profit & Loss Account for the year ended 5 April 200x.  Do you see an item that says 'Wages £5,200'?"

 

A "Yes."

Q "Did you employ anyone that year?"

A "No."

Q "Where do you think that figure came from?"

A "I have no idea, I am not an accountant."

 

Only later in cross-examination on behalf of the defendant would an explanation begin to emerge.

Q "Does your wife help you in the business?"

 

A "Yes, she keeps the records, deals with business correspondence & answers the phone when I'm at work."

Q "Do you give money to your wife?"

A "Yes."

Q "Is her help worth £100 per week?"

A "She is worth much more than that!"

Draw your own conclusions!

David

Clients that stupid?

anndartnall | | Permalink

I can't believe that such a high proportion of his clients were that naive as to not be aware of their true income. They just wouldn't survive as sole traders if they had so little "nouse".

Clients are supposed to get, read and sign off their SATR before it is submitted, or at least reply to the email with the SATR attached that it can be submitted in lieu of a paper signature. I hope some of them are being prosecuted as well.

davidwinch's picture

Prosecutions

davidwinch | | Permalink

anndartnall wrote:

I can't believe that such a high proportion of his clients were that naive as to not be aware of their true income. They just wouldn't survive as sole traders if they had so little "nouse".

Clients are supposed to get, read and sign off their SATR before it is submitted, or at least reply to the email with the SATR attached that it can be submitted in lieu of a paper signature. I hope some of them are being prosecuted as well.

Only Mr Pearce has been prosecuted.

A number of clients and former members of staff co-operated with HMRC by giving witness statements and, in some cases, giving evidence from the witness box during the trial.

HMRC also encouraged clients of Mr Pearce to come forward with voluntary disclosures concerning their previous years' tax affairs.

David

Bridging the gap

secondhand_22 | | Permalink

Earlier in the year, a few people on here expressed surprise that all clients in every firm I've ever worked for receive a computation along with their return.

My view is that returns are hard to read whereas computations are a lot more understandable.

It seems that there are more than a few accountants who don't provide their client with a computation.  In such cases, there is, in my view, greater potential for misunderstanding.

So perhaps there is more that some accountants could do.  Of course there will always be clients who refuse to try to understand their figures/returns but you have to at least give them the opportunity

Ignorant clients ?    2 thanks

Jack the Lad | | Permalink

I used to be criticised by partners for sending long explanatory letters with the draft accounts and tax return, clearly setting out all estimates and reasoning, and requesting agreement or alternative information, prior to requesting approval to the accounts and return.  However, I still do this 50+ years on, and this Case shows the necessity and importance of that.  Inevitably my fees would be a little more than cost cutting competitors, but most clients recognised the benefits.

 Also, I rarely requested repayments to be made payable to me, unless the client had cash flow difficulties and agreed to having my fees deducted prior to paying over the balance, and then all repayments were paid into a Clients' account (isn't this a requirement of the ICAEW ?).

Frustrating    1 thanks

Jekyll and Hyde | | Permalink

anndartnall wrote:

I can't believe that such a high proportion of his clients were that naive as to not be aware of their true income. They just wouldn't survive as sole traders if they had so little "nouse".

Clients are supposed to get, read and sign off their SATR before it is submitted, or at least reply to the email with the SATR attached that it can be submitted in lieu of a paper signature. I hope some of them are being prosecuted as well.

I remember watching "The Firm" a few years ago and the bit that always stick in mind is towards the end when the FBI hooked the firm on timesheet fraud. The FBI's remark along the lines of "if accountants didn't file such accounts, the criminals wouldn't be able to launder their money". I have always thought this to be quite true and this case highlights that if the rouge accountants didn't put such expenses through then the tax payers wouldn't get away with it.

I come across too many rouges working with the smaller taxpayers, and it makes my job a lot harder. The amount of times I hear "my current accountant allows me to claim for such and such". or "do you work for the the client or HMRC" or "you are to legit" They know full when that their accountants are prepared to put through a tax fiddle at best tax evasion at worst. I hope HMRC have the backbone to approach government and ask for more funds to focus on this aspect of the smaller accountancy profession. One good way to raise revenue, rather than make it more difficult for the fully compliant taxpayer. Finally, I know of one rouge that gets around registering with HMRC for money laundering, by getting their clients to submit their own returns, etc. The sad thing about it is that a lot of the clients must think he is doing a very good job. I have taken 2 clients from him and have had to reinstate accounts ant tax returns for both clients. It is shocking that he is allowed to still trade. 

 

Thanks for the reply David.

darrenwilliams | | Permalink

Thanks for the reply David.

It sounds like the figures/estimates involved may be very large, probably would have been picked up a lot quicker by HMIT before online fling, when HMIT actually agreed accounts.

Samantha, interesting to hear that this is not a sole trader and a large(ish) office setup. 

Thank you.

 

conclusion...

justsotax | | Permalink

spouse wages claimed...client doesn't understand but is happy with the tax relief....hardly shocking....and this type of practice was regular only a few years back and carried on by 'qualified' accountancy practices I venture to guess...

accountsdragon's picture

Stupid or afraid?

accountsdragon | | Permalink

I agree with Darren.  I don't want clients just to sign off accounts and tax returns without some idea - it's their business after all.  But it is an uphill struggle.  I try to encourage them to understand their numbers, but watching their eyes glaze once I say the word 'tax' does make it difficult.

I am surprised that anndartnell is so surprised. So many self-employed people do have a good gut-feel for what they are doing, and they have plenty of nouse.  They just don't like dealing with paper and numbers.  That's what we are here for.......

miketombs's picture

Hopefully we cover the bases ....

miketombs | | Permalink

...with CIS clients. Apart from giving them the full tax return and a computation, the fee note includes a paragraph noting that we anticipate the fees being recovered from a refund paid into our Client account, but that they remain personally responsible if for some reason that doesn't happen. In the 'authorisation to file' letter I record that the tax return is based on information they have provided, and list the major expenses included (tends to be mileage and protective clothing.)

davidwinch's picture

Client bank account    1 thanks

davidwinch | | Permalink

Jack the Lad wrote:

all repayments were paid into a Clients' account (isn't this a requirement of the ICAEW ?).

Yes, ICAEW requires its member firms to have a client bank account where the firm receives tax repayments on behalf of clients.  I believe other professional accountancy bodies have similar rules.

But there is no general rule that applies to all tax accountants.  It is estimated that about one in four tax accountants is not a member of any recognised professional body.

David

davidwinch's picture

The shock perhaps

davidwinch | | Permalink

justsotax wrote:

spouse wages claimed...client doesn't understand but is happy with the tax relief....hardly shocking....and this type of practice was regular only a few years back and carried on by 'qualified' accountancy practices I venture to guess...

The shock perhaps is that in the course of the prosecution case it was alleged that this (along with other matters) was indicative of dishonesty and cheating HMRC by Mr Pearce.

David

Problem with small clients............    1 thanks

Tosie | | Permalink

Over the years I have had to enter many estimated expenses, not to gain a tax refund but because I know that the client has incurred the expense but not recorded it.

I suspect that most people preparing accounts from bin bags make estimates so that part of the trial is a warning to us all.

What are we supposed to do ? We try to get clients to keep records but there are clients who have been forced into self employment who frankly are not capable of dealing with the paper work.

spouse wages...    2 thanks

justsotax | | Permalink

use of home (multiple of 52) adjustments etc for micro businesses...are to be fair pretty common practice amongst both chartered and QBEs....we shouldn't mistake this for the crooked way in which this guy operated to in order to line his own pockets. 

BKD's picture

Estimates    1 thanks

BKD | | Permalink

Tosie wrote:

What are we supposed to do ?

Quite simple - you either tell the client that unless he improves his record-keeping he's not going to get all the tax relief that he's entitled to, or make damn sure you mark the return as containing estimated figures and put a full explanation in the white box .

BKD

Tosie | | Permalink

Thank you.

davidwinch's picture

@ Tosie

davidwinch | | Permalink

Don't forget if you have signed a Memorandum of Understanding with HMRC (via the Tax Agents Initiative Team) that may impact on the extent to which you can base expenses claims on estimates for CIS subcontractors.

David

Too Much Rouge!?    2 thanks

Mister O | | Permalink

 

Hilarious, thank you!  Who are all these blushing red accountants!? 

She wore far too much rouge last night and not quite enough clothes. That is always a sign of despair in a woman.
Oscar Wilde
 

thanks David

Tosie | | Permalink

Thanks David for the reminder and ofcourse for this posting which is most helpful.

my problem with this...

new2accts | | Permalink

Clearly this man didn't care about the law and by requesting a clients rebate into your own office account is clearly illegal, not to mention shocking behaviour considering the trust placed on him. I do worry about the clients who have stated that they were not aware of the expenses as claimed, as surely every business owner despite the lack of understanding of accountancy does understand the expenses paid, such as wages. How can you say you did not understand that £5000 was claimed for wages for example. If you did not pay it, you did not pay and should not claim a deduction for this?

This has worried me, as I do not exaggerate or make up expenses, however does this case leave the door open for other clients who have claimed illegitimate expenses to blame the accountant and an ignorance of the law? I thought that there was no defence to ignorance of the law, so surely the clients should be held to account if they were a party in the wrongdoing? ( I am not sticking up for this particular accountant, I do think however if a client signs to agree a document then it should stand that a reasonable person with capacity understood the contents)

To include estimates or not?

North East Acco... | | Permalink

A lot of small sole traders have less than perfect books with some expenses recorded but by no means all. Would you include estimates of unrecorded expenditure based on a client interview or not? Very interested in all views, thanks.

Integrity

Red1960 | | Permalink

 

Anyone who thinks that these levels of dishonesty and incompetence are confined to the "unqualified" segment of the profession needs their head examined.

I'd not even hesitate to suggest that the sums involved in fraud and dishonesty from the "unqualified sector" represent a small fraction of those in "qualified" sector.

Scandalous to think that Mr Pearce wasn't provided with the opportunity to simply make good some small fraction of the amounts involved (say 10%) and given a stern talking to.

After all what's good for cabinet minister Maria Miller must surely be good for everyone else.

Justice must after all be seen to be impartial.

 

Over the years I have seen    1 thanks

Vaughan Blake1 | | Permalink

Over the years I have seen many cases of the following CIS/715 subbie scenario.

Subbie works a day rate, he knows exactly how much he earns and that tax has been deducted.  He can therefore budget on spending his entire earnings safe in the knowledge that no extra tax is due.

At the year end the subby presents his accountant with CIS vouchers (I know, bring back 715 certs!), a few receipts for petrol, tools and a new van.

The accountant does the annual accounts and behold, a refund arises.  The accountant takes his fee from this (via his client account!) and pays the balance to Mr Subbie.  Mr Subbie then spends his refund on his summer holiday, location dependent on the size of the refund. Some years Majorca, others Bognor.

Mr Subbie has no idea about the accounts, AIA on his new van etc etc. He trusts his accountant and signs what he is given without actually looking at it. The tax refund is his annual 'bonus'.

Done honestly it's a pragmatic solution for everyone.  But, if the subbie only shows the CIS wages and er forgets the cash jobs and the accountant gets lazy, treats all his subby clients on a generic basis. Puts through the same estimates for travel etc as last year (plus 5%) and a figure for wife's wages just under the NI limit- (oops why didn't you tell me that she got another job three years ago and that you have been working on a site at the end of your road since the Newcastle contract finished) then it develops into the situation we have here.

Laziness, criminal ignorance and arrogant complacency as much as actual outright dishonesty here. I don't think that making a few small reasonable estimates based on the specific facts of the case and reviewed annually, will see any of us sharing a cell with Mr Pearce!

Subby quote of the century was, 'all my cash jobs are done on a Saturday which because it's my day off ain't taxable'

 

DMGbus's picture

Omitting estimates = false accounting    1 thanks

DMGbus | | Permalink

If I produce a set of accounts that omit legitimate business costs (because I've decided to omit those without invoices) then those accounts portray a false picture of overstated profitability.      Absolutely wrong, especially if such accounts' net profit figure is used to support a mortgage application.

Therefore I always advocate inclusion of ALL business expenditure vouched or not, if no immediate supporting documentation then appropriate computations should be used to support the estimate used and be ever so careful not to overstate (or understate) said expenses.   Regarding vehicle fuel there will be MoT test certificates or servicing records to assist in computing appropriate value for petrol or diesel.

Tax relief is a separate issue.   The first firm foundation of a tax return is accounts that show the whole of both the income and the expenditure.  Beyond this point some accountants (*) might feel it "necessary"  to disallow estimated expenditure for SA103 purposes, that is their only legitimate way of disallowing said expenditure.

(*) "Some accountants" may well fairly be regarded by their clients as "working for the Revenue" as this is a good example of bad accounting - the omission of legitimate (but maybe too difficult or troublesome for them to quantify) expenditure from a set of accounts.

davidwinch's picture

Estimates v HMRC TAIT MoU

davidwinch | | Permalink

But might there be a problem (in the case of a subcontractor in the construction industry) where the accountant has signed a Memorandum of Understanding with HMRC (Tax Agent Initiative Team) and including estimated expenses would result in expenses exceeding 20% of turnover (because records will not be available to support that)?

David

I think the article (and the prosecution case)

justsotax | | Permalink

loses a little integrity when the heading 'client's lack of accountancy and tax knowledge' is matched with the client unable to multiply £100 by 52 weeks...the last time I checked the ability to multiply was not exclusive to 'accountants'.  It seems the clients wanted to distance themselves from the accountant by proving just how stupid they are.  (never mind the conversation suggesting they pay their spouse to reduce their tax bill, which they then conveniently forgot....cynical....yup!) 

davidwinch's picture

@justsotax

davidwinch | | Permalink

I think the point you are making is exactly the one I was making in the article.  The clients were distancing themselves from the accounts and tax returns & blaming everything on Mr Pearce.

Of course the prosecution were only interested in demonstrating to the jury that Mr Pearce was guilty of the offences with which he had been charged.  That is the purpose of the prosecution in a criminal trial.

David

bookmarklee's picture

Client confirmation

bookmarklee | | Permalink

Tosie wrote:

Over the years I have had to enter many estimated expenses, not to gain a tax refund but because I know that the client has incurred the expense but not recorded it.

What are we supposed to do ? We try to get clients to keep records but there are clients who have been forced into self employment who frankly are not capable of dealing with the paper work.

There has always been a need to include reasonable estimates re unvouched expenditure incurred by some owner managed businesses.

When I was in practice we always listed any such estimates included in the accounts and we required clients to confirm in writing these were reasonable or to provide alternative figures before we finalised their tax returns. 

Mark

jndavs's picture

Estimates

jndavs | | Permalink

I have some guard ducks....

 

ccassociates's picture

Fiddler at the desk

ccassociates | | Permalink

Too many self employed and particularly those in CIS see their accountant as the person whose job it is to fiddle their tax, they honestly believe that is our purpose. This can be evidenced further by those who are in full time employment and always have been who also believe that is the purpose of an accountant.

Add that to the fact that some of these unfortunate yet hard working subbies are not the sharpest tool in the box and I can believe that there are some who cannot multiply 100 by 52. I once knew a marvelous carpenter who could not read or write and had difficulty adding up, but put him on a dartboard and he would calculate your "out" in seconds

Men like Pearce take advantage of this culture in order to line their own pockets, I have witnessed the same behavior from qualified FCA's and ACCA's working on a percentage of the refund as their fee.

I see part of my job as educating the client as to what is legitimate and the consequences of fiddling and on the rare occasion that I claim un-vouched expenditure I make sure the client understands that I expect him to keep all his receipts next time, those who choose not to accept or to question my methods are not retained as clients, as experience shows that the first thing the client tells HMRC in an investigation is. "my accountant told me to do that "

Strangely enough I am working on a sub-contractors accounts right now, and I see that he has not taken my advice to stop buying fags , chewing gum, coke, etc with his fuel on his debit card as the time I spend removing them increases his fee, ho hum! 

Not a great business plan

Vaughan Blake1 | | Permalink

ccassociates wrote:

I have witnessed the same behavior from qualified FCA's and ACCA's working on a percentage of the refund as their fee.

This has always looked like a dumb idea to me.  Frequently there will be years with no refund due to a balancing charge, more non CIS work than usual or a period of PAYE employment or even a sabbatical type holiday to go to Oz or do up a buy-to-let.