Money laundering ?????

Three new clients have approached us, and I don't like what I see.

All three are ladies hairdressers.

They all share the same premises. Rent, rates, power, etc are all paid from one business bank account, and enough funds put into it by the 3 hairdressers to cover it.

They then have three individual sets of accounts prepared as "sole traders" showing their taking, minus one third of the joint expenses.

Whilst this is broadly neutral from the tax point of view, in my opinion it is a blatant "VAT fiddle". They are effectively partners in one business. Each individual last year showed a turnover of around £30k-£40k.  Individually this keeps them below the VAT registration threshold, but, as a partnership their total turnover would have been £115k, well above the registration threshold.   This indicates something in the order of £20k VAT evaded.

 

Any observations?  Or am I missing something here?

 

 

 

Comments
Caber Feidh's picture

What if one of the hairdressers owned the premises    2 thanks

Caber Feidh | | Permalink

What would be the VAT position if one of the hairdressers owned the premises and rented space to the other two?

Lord Lucan's picture

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Lord Lucan | | Permalink

Presumably the 2 paying rent would not need to register for VAT, the one who owned the premises would have to register as income plus "rent" would take them over the registration threshold.

However, that is not the case as they have not paid rent, they have shared all expenses equally.

 

artificial separation    3 thanks

The Black Knight | | Permalink

 Financial, organisational and economic links required. but I would say joint bank account has shot them in the foot, and they are at risk to a past assesment, let alone a direction going forward. Do their work stations clearly indicate to the public that they are seperate businesses ? i suspect if banking was not seperated then nothing else has been either.

money laundering ?? who knows.... will be after they don't put it right when you tell them.

Bad advice possibly ? who did this the client or the accountant ?

I think there is still an amnesty for late Vat registration ??

Tax office accounts    2 thanks

The Black Knight | | Permalink

This is how many a tax office would prepare partnership accounts or ex tax office employee ? am I right ?

 

BKD's picture

No money laundering    3 thanks

BKD | | Permalink

Based on what we've been told, and only on what we've been told, I don't believe there to be a money-laundering issue. I can see nothing dishonest in their activities, and all three appear to be operating three legitimate businesses. The onus is on HMRC to demonstrate that the business is in effect, for VAT purposes, a partnership (and possibly may always have been). Having seen this kind of thing before, HMRC are more likely to issue a prospective direction, but clients should be advised that a retrospective assessment (and penalty) cannot be ruled out - as TBK says, the joint bank account is less than helpful here.

As always, I'd be interested to hear what the real expert in such matters - David Winch - has to say.

Lord Lucan's picture

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Lord Lucan | | Permalink

As far as I can see there is nothing to indicate 3 separate businesses, in fact the contrary. One (jintly employed) receptionist, all taking into same till, one business name above the door, etc.

My take on it is that they have benefited to the tune of about £20k in unpaid VAT by what I consider to be a clear artificial separation. I havent considered if any income tax benefits accrued to them by this, but suspect that may be negligible.

weaversmiths's picture

From an ex tax office employee    1 thanks

weaversmiths | | Permalink

What a mess!  I would guess that the clients set this up - I cannot believe a "qualified" could do this.  [Sheathing her claws(:-)].   I have not had need or experience of the VAT amnesty but it certainly looks as if this may help and, if the clients did set this up, I doubt there was any avoidance intended as most dont understand the ins and outs of VAT - though ignorance etc etc.......  One of the problems here is the trade in question - being labour intensive there will not be a lot to set against VAT owed, lets hope that there was VAT on the rent as it is a commercial letting.  I agree the joint bank account is the main problem.  It needs sorting out sooner rather than later. I have had to sort out much worse VAT problems than this - at least any dues can be split between three people.

TheAncientOne

BKD's picture

As I caveated ...    1 thanks

BKD | | Permalink

... my comment was based only on what we were told - it seems that we were indeed missing something. We're now told that there is a single business name above the door, there is a single receptionist and a single till (and there may yet be other pertinent facts - "etc") - all of which change the complexion somewhat. If advice is sought, it helps to be provided with all of the facts.

I'm still not convinced that there is a money-laundering issue. I've come across quite a few artificial separation cases where the taxpayers genuinely had no idea the provisions existed and that there was a VAT problem with what they were doing. Of course, that says as much about the expertise of the previous agents as it does about the naivety of the taxpayers.

But hopefully DW will keep us right.

i would say    2 thanks

The Black Knight | | Permalink

That there has been no separation, artificial or otherwise, therefore there is a failure to register and pay VAT. The separation into three sets of accounts would appear to my mind to be false accounting, your call whether that was deliberate or not for money laundering purposes but I would say it is careless to negligent for civil penalties purposes may even have some element of concealment, at least by the previous adviser who will be/ should be deemed to know better ?

Information needed but no initial concerns here    2 thanks

Marion Hayes | | Permalink

Based on past experience of differing models utilised in the hairdressing industry I would expect to see the following profile:

1. All registered as self employed

2. All with their own services and price lists, leading to their own customer base.

3. A till capable of recording all sales to the appropriate hairdresser.

4. Purchases of their own products with differing suppliers and probably at differing prices.

5. Takings passed out according to their own activities and banked into their separate accounts.

6. A joint account into which funds to cover joint property expenses in accordance with the expense sharing arrangement are transferred from the individual business accounts.

This arrangement is quite common and does not constitute a partnership nor a joint venture as there is no income or profit sharing arrangements..The only expenses which are shared are the property expenses, whether by one property holder subletting and claiming the expenses against the rental income (the famous chair rental) or a mutual tenancy.

It is very common for there to be only one generic name above the door and we are all aware whether our hairdresser works for someone else or themselves.  However, any further sharing of income or expenses apart from the property expenses would blur the profile.

 

Lord Lucan's picture

To answer your questions -

Lord Lucan | | Permalink

 

1. All registered as self employed - YES

2. All with their own services and price lists, leading to their own customer base.- NO - single price list in generic name.

3. A till capable of recording all sales to the appropriate hairdresser.- NO.

4. Purchases of their own products with differing suppliers and probably at differing prices.- NO, supplies (shapoos etc, towels, and equipment such as combs, brushes, hair dryers etc. purchased "centrally", no record of who uses what.

5. Takings passed out according to their own activities and banked into their separate accounts. - Separate accounts but no record of how distribution calculated.

6. A joint account into which funds to cover joint property expenses in accordance with the expense sharing arrangement are transferred from the individual business accounts.- Bank account in the generic name, actually states  Miss A, Miss B & Miss C, trading as *******.

 

 

The Minion's picture

One Business - one registration    1 thanks

The Minion | | Permalink

From the detailed summary it looks to me like they would fail to show they have separate businesses.

Saving Graces?

1. Any previous advisers PI available to cover past liability and then sort out the mess for the future?

2. Flat rate scheme to mitigate overall liability?

3. From memory the amnesty ran out at the end of September?

@ Lord lucan    1 thanks

Marion Hayes | | Permalink

Based on the answers you have given I would say that as you cannot distinguish between the separate businesses there is only one trade.

Whether that is a partnership or there is a principal with disguised employments. there is definitely a VAT issue as you identify.

regards

Marion

Lord Lucan's picture

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Lord Lucan | | Permalink

It seems they don't want to address the VAT issue - so I wont be acting for them. I suspect they will be far more trouble than they are worth.

 

 

What a surprise !    1 thanks

The Black Knight | | Permalink

yep........... definately more trouble than they are worth.

still you may have helped them cover up past demeanours and HMRC will fail to notice anything...... is it any wonder there is a tax gap ! ha ha

what tips ?

BKD's picture

I suppose the point is ....    1 thanks

BKD | | Permalink

.... if there is a money-laundering issue (which I'm yet to be convinced there is) declining to act doesn't avoid the need to report. In the circumstances, since there is nothing to gain, but everything to lose, by not reporting I would file a report.

Lord Lucan's picture

Done

Lord Lucan | | Permalink

Given the highly aggressive almost threatening response I received when I stated I was not prepared to accept them as clients if the situation was not regularised I have indeed filed a report.

I AM convinced that this is an artificial separation for the sole purpose of evading VAT.

 

 

 

BKD's picture

Tipping off?    1 thanks

BKD | | Permalink

Risk of there being sufficient information on this site for the tax(non)payers involved, were they to happen across it, to recognise themselves?

be careful

The Black Knight | | Permalink

not to say whether a report has or not been made..... only that you are considering...

not that HMRC will notice......

because they are as much use as a chocolate teapot.

The Minion's picture

clarification please

The Minion | | Permalink

As far as i can see they didnt actually make it as clients so is there a reporting issue here, where LL can actually safely make a report?

Isn't MLR restricted to clients only, not potential clients?

Safely ?

The Black Knight | | Permalink

Why would it be unsafe ?

Fairly sure that it applies to any information that has come to you in the course of business.

Client or not or ex client, dead Parrot or otherwise would make no difference.

Legal privilege may apply, but in this case it does not appear that the prospective clients were seeking legal advice as to their position.

The cheaper and less risky option in terms of time, paperwork and everything else would be,... If in doubt ? Report.

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