Newth Talks Tax: What would you do?

Despite being from 'another planet' i.e. Mazars LLP which is a fairly large firm I do empathise - we all get clients who come to you with prior year returns that are clearly incorrect - and it is always your fault for spotting an underpayment as the Revenue hadn't queried the client!

Aside from the money-laundering issues, I'd say to point out to the prospective client that previously they'd paid peanuts and hired a monkey, so they needed to be prepared to pay a reasonable commercial rate going forward - fee disputes never end well and under-paying clients are a PI claim waiting to happen...

Long term recommend them a good book-keeper, or agree to keep their books for a fee yourself - bad books make everything take twice as long and you may spend longer on remedial work to the books (or hunting for the basic information) than you would doing them in the first place. Plus you will spot issues earlier and get a chance to be more pro-active which will reduce your risk and boost your fees both.

Otherwise why not consider rebalancing their loans - the rental property may still be above water if it was bought a while ago and HMRC have said they see nothing wrong in extracting capital by mortgaging rental property to the hilt and repaying the home mortgage with the proceeds - or in then claiming full deduction for the higher interest. Knowing that they will save tax going forward may encourage the client to accept their historic liability and prove your worth...