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Advice needed - have made a massive payroll error

Accountant needing advice please

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Posting as anonymous as am so upset about what i've done (or not done). Please be gentle - need genuine advice as an accountant who is admitting a big cock up on behalf of a client...

I have a client who runs two businesses. One business was set up 10 years ago - shareholding of which was 50:50 mother and daughter.

They decided to open another (same industry) business 2 years ago, but the accountant who prepares their accounts (not me) suggested they do it as a completely separate company so that if the 2nd business failed, it wouldnt affect the first business, which had been running successfully for 8 years already.

The new company was set up - same shareholding as before (50:50 mother / daughter) but on a new site, different staff, different management, different customers, separate PAYE scheme & payroll / bank accounts etc. The intention was for the new business to be completely self sufficient & separate from the first.

I run both the payrolls of the 2 businesses. In my error, I have just come to realise that I have claimed employment allowance for both payroll schemes when this wasnt allowed. Whilst its no defence at all, I had no idea about the connected business rule surrounding the employment allowance - the basic gov.uk website only mentions companies in the same group - I wouldnt classify these 2 companies as being in a 'group', but merely having shareholders in common.

An accountant friend alerted me to the legislation around connected companies and interdependency of businesses and the claiming of the allowance yesterday. I've spent hours researching the subject & have had to come to the conclusion that i've royally cocked up here by claiming the allowance for 2.5years (2nd business was set up part way through the 2016/17 financial year).

Rather than flame me for being a complete moron (don't worry, i've already done that myself) I am now faced with the quandary of what to do next. Obviously meet with the client to advise them of my error. Advise them to admit to HMRC what has happened and then go about re-setting the payroll statuses for the last 3 tax years to repay the allowance. This will cost my client around £8.5k, which I don't think they can afford in one go. I have professional indemnity insurance - can they sue me for negligence to cover the claim? I would obviously comply completely as I feel its entirely my fault. Has this happened to anyone else, and what did they do? Am I a complete idiot for not knowing this piece of legislation?

I've been up all night worrying. I only have a handful of clients as I do this on a part time basis (i'm a mum with 3 young kids - again, no defence) but it has made me realise that I just don't have the capacity to familiarise myself with all the legislation. I only take on 'straightforward' clients - turning down anything that i'm not comfortable or familiar with. I thought I was doing ok until this, and now wonder whether i'd be best to resign & pack it all in.

Any advice would be much appreciated. I pride myself on getting everything just right for clients, so i'm terribly upset about this oversight

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By Matrix
15th Dec 2018 11:46

Stop beating yourself up, none of us are perfect and PII is there for a reason.

You say that the intention was to run the businesses separately, so did this happen or is there interdependence, shared employees, premises etc?

I would not automatically assume the allowance is not available.

Do you know whether this was addressed when the second company was set up? Was it really to ring fence the businesses or to gain a tax advantage by claiming EA x2? Why did they change accountants?

Honesty is always the best policy, while there may be a risk and, depending to your responses to my questions, I would probably get a second opinion before advising the client to voluntarily pay it back.

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to Matrix
15th Dec 2018 12:24

Thanks for your honest & quick reply.
There has been no change to accountants - they use a firm to prepare their accounts but used to use an in-house person to do book-keeping & payroll. She left 5+ years ago (way before 2nd business was set up) & they asked me to do payroll for the then 1 business.

When they decided to open a 2nd site of the same trade (let’s say hairdressers) they weren’t sure of how successful the 2nd business would be (different town) so agreed with their accountants to create a whole separate company in order to make sure a failure of the 2nd business wouldn’t impact the first (if they were trading as 1 business in 2 sites). They did it honestly - not to take advantage of 2 EAs etc. I duly set up the second payroll for the 2nd business & thought nothing more of it. It’s a genuine error on my part (poor gap in my knowledge)

Everything was kept separate to my knowledge - separate employees, manager, customers, premises, equipment etc. Only thing in common was the same 2 shareholders. However, having looked at the recently filed accounts, there is a loan balance between the 2 companies which obviously makes them interdependent.

I don’t have anyone else to get a 2nd opinion from - hence asking accountingweb as a first port of call. I could contact a tax advice specialist but I think it’s pretty clear cut.

Apologies for posting anonymously, I don’t think A.W. members like it much. But I’m mortified by my own stupidity.

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15th Dec 2018 12:28

From your post it sounds as though you don't prepare the accounts, but the businesses have an accountant. Does that mean you are operating as a bookkeeper/payroll person?

If that is the case it sounds as though either the accountant didn't know the rules either or the accountant hasn't noticed anything amiss when doing the accounts. Certainly we would do a PAYE reconciliation and expect to pick this up. Already I'm thinking that the responsibility for the error is 'shared' between you and the accountant (so the problem is 'halved').

If you get on well with the accountant talk to them and the client. You know it can not be ignored and the more you put it off the more rotten you will feel.

Don't worry too much that you think the client can not afford the employer's NI. That suggests that if this was picked up earlier they couldn't afford it either so it was always unaffordable.

If you deal with this in a mature and professional manner there is a good chance you will come out of this with a client who wants to retain you and your reputation enhanced. Enhanced because there is a lot to admire in someone who is honest and admits their mistakes.

It is right that the mistake should worry you but don't let it crush your confidence, spoil your Christmas or make you ill. A New Year's resolution for you can be to go on an annual refresher course where you will pick up on legislative updates. Look up Mercia Training and see if they have a location near you.

Good luck and let us know how you get on. I guarantee it won't be as bad as you fear.

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to andy.partridge
15th Dec 2018 12:46

Thanks, yes you’re right - I do payroll & also agreed to do their book-keeping after their in-house lady left as their accountants were going to charge a small fortune for the book-keeping. I am ACA myself (so believe I should be on top of this type of thing) but have taken years out having babies. I do this on a part time basis & agreed to do the book-keeping (without the accounts prep part) along with the payroll as they’d been left in a bit of a pickle when the in-house lady left.

Yes I guess their accountants will know that they’re claiming EA in both companies as they do do a PAYE reconciliation for both companies - they sometimes ask me for additional payroll info at accounts prep time. I suppose it’s been missed by both of us. However it’s ultimately my error.

I intend on being completely honest & not laying the blame with anyone else. I’m just not sure what options are - could the business repay by way of a repayment plan? I suspect they could afford that but not a repayment of the total amount all in one go. I suppose also that there could be tax savings as the profits will be lowered if not claiming £3k allowance each year.
Unfortunately it has both crushed my confidence & made me massively doubt my abilities as an accountant.

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By DJKL
15th Dec 2018 12:48

From a PI point of view you may have a liability, but only re costs etc they incurred in addition to what they ought to have paid if processed correctly day one.

As they possibly ought not to have claimed the ER then its cost is certainly not your PI liability, interest, penalties and consequential costs may be, time and costs sorting may be, but the original EA claimed is not (imho). Restitution ought to put them back to the position they would have been in had the error not occurred.

So be careful re your mea culpa, make no promises you are not obliged to make, if you decide on voluntary restitution then ensure you first determine your liability and what you are prepared to pay over and above your liability- feelings of guilt re error can lead to rash promises and commitments that ought not to be made.

Also, if your PI insurers are to be involved, talk to them first before admitting guilt to client.

p.s. remember if they are profitable the full EA cost will not need to be met, they will get tax relief re CT from it being reversed in the accounts- every cloud.......

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15th Dec 2018 13:07

You have been given some sound advice here, just want to say that we have probably all been there one way or the other, give yourself a break, slow down and think it through bearing in mind the advice here..and remember, this will be history one day

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15th Dec 2018 13:11

Very easy mistake to make, so don't beat yourself up about it.
As others have said you wouldn't be liable for the overclaim.

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15th Dec 2018 13:29

Thank you all, you’ve been so helpful (& kind). I do feel overly emotional & guilty about it, not aided by the fact I can’t do anything about it until Monday other than stew in my own guilt. Hopefully I’ll wake up tomorrow in a better frame of mind, formulate a plan of action & address the client first thing Monday morning. Let’s hope they haven’t decided to seek winter sun & I have to wait until 2019.

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By SXGuy
15th Dec 2018 17:51

I'm gonna say something different. Rather than the standpoint you have done something wrong, maybe your being abit hard on yourself.

You gave good example of how the two businesses are not related to each other, but yout worried they are with regards to EA.

Surely it can't be both ways, if they are separate, then they are separate.

If your confident that they are, then continue as is. It's down to interpretation at the end of the day, and none of us can say for certain if they are separate or not. Only you know that.

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to SXGuy
15th Dec 2018 18:42

Thank you, I think I’ve read every single piece of legislation & guidance & I’m still somewhat confused! Because I’m not the accountant preparing the accounts I can’t say anything for sure but I’ve a strong feeling it shouldn’t have been claimed for both companies.

Having said that, & taking into account another earlier helpful comment, the accountants prepping the accounts will have seen the EA being claimed for each company as they have done PAYE recs for each company (or I assume they have - they’ve asked for additional payroll info in the past in order to do so). Whilst I’m never laying any blame at their door for not picking up on it, I will suggest to my client that we go back to their main accountant & see what their take is on it - perhaps they felt it perfectly reasonable for both co’s to have the EA as they set up both companies & know how they run. I have only based my reasoning on filed accounts at companies house.
But thanks for being positive / taking a different point of view, is all helping enormously.

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15th Dec 2018 18:06

I’m assuming you have read up on this already before coming to your conclusion:
https://www.gov.uk/government/publications/employment-allowance-more-det...

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to andy.partridge
15th Dec 2018 18:44

Yes thanks - I have now. Shame I didn’t think to read it 2 years ago when the company was first set up.

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to Anonymous1975
15th Dec 2018 19:17

Perhaps the accountants also have and came to a different conclusion. Perhaps they didn’t, but should have. Don’t be too keen to accept the blame.

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15th Dec 2018 20:26

I'd suggest you talk to your PI firm before you mention this to the client and then follow their advice/guidance.

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15th Dec 2018 20:39

Were you fully informed of the setup in writing by the client or the accountants from the outset?

The Code of Ethics of most bodies make it clear that if a professional accountant undertakes work for a client which is complimentary or relevant to the work of another professional accountant engaged by the same client, then they should notify them of their work. Was all clear from the start?

Liability for this may not be a clear cut as you think - don't admit liability unless you are entirely sure.

P.S. For what it's worth, I'd expect HMRC to be reasonable about this. There may be penalties and a bit of interest, but a fully informed unprompted disclosure should keep these to a minimum - and remember to ask for any penalties to be suspended.

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By jcace
15th Dec 2018 22:55

Bear in mind that if the companies are shown to be connected, they would still be allowed to claim in both companies in 16/17 as the connection rule only applies if two or more companies are connected at the start of the tax year. That would leave 17/18 to correct after the event and 18/19 to sort out in the current year.

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to jcace
16th Dec 2018 08:56

Thanks for this - I’ve read similar on accountingweb this weekend but wasn’t sure if completely correct.... have you seen this happen in practice & I wonder if HMRC would actually accept this reasoning in reality?

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By jcace
to Anonymous1975
16th Dec 2018 19:40

HMRC's technical guidance on connected companies and Employment Allowance:
"If, at the start of the tax year, 2 or more companies are connected with each other and those companies would otherwise each be entitled to the Employment Allowance, only one of those companies can qualify for the Employment Allowance for that tax year." This is also in line with the legislation, so as long as Company 2 was incorporated after 5/4/16, you're fine to claim EA for 16/17.

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By jcace
to Anonymous1975
16th Dec 2018 20:50

And have both companies used up the full £3,000 in both 17/18 and 18/19? If neither has, or if one has and one hasn't, then it's a matter of choice as to which company withdraws its claim.

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to jcace
16th Dec 2018 21:14

Assuming first year (incorporation year) is ok, then used up both 17/18 & 18/19 in full, so £6k total. However I believe the company was profit making so with the Corp tax recalc then it’s less than that total amount. Am feeling better about the situation now, thanks to all this helpful advice. I’m aiming to be frank, open & honest tomorrow, firstly suggesting we check with their accountants re claim as they have not raised it as an issue in the annual paye recs / accounts prep thus far so may have reason to believe claim is fine. (Or simply haven’t clocked it either). Then we’ll take it from there.

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By jcace
to Anonymous1975
16th Dec 2018 21:22

And I presume that both companies have fully utilised the EA in each year.

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to jcace
16th Dec 2018 21:32

Yes I believe they have. Will go through all the figures in full tomorrow.

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16th Dec 2018 07:40

As others - 1) don’t beat yourself up - we’ve done it recently having claimed for all 4 companies under common control & management; 2) the accountants didn’t pick up on it either, a fact which I would mention when you own up.

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to atleastisoundknowledgable...
16th Dec 2018 09:02

Thankyou. I’m sorry you’ve been caught out similarly - do you mind me asking how it came to light for you? Did you have any penalties to pay?

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17th Dec 2018 09:47

It is not your clients problem it is yours.
Your mistake you have to pay it.

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to meadowsaw227
17th Dec 2018 10:10

Do please explain. it's nearly Christmas not the Apocalypse.

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By DJKL
to andy.partridge
17th Dec 2018 10:34

The Eight Reindeer of the Apocalypse- sounds more like something Terry Pratchett would have written .

(Note to self- start reading the Discworld series in proper order whilst on holiday over Christmas rather than just picking at them in an ad hoc manner)

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to meadowsaw227
17th Dec 2018 10:39

Thanks for your response. I’m not sure I agree that the entire liability is down to me. I’ve made a genuine professional error & I’m owning up to it & preparing to face the consequences. All input is greatly appreciated so if you could expand, that might be helpful...

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to Anonymous1975
17th Dec 2018 10:46

Ignore it. That person is either mischievous or speaking from a position of lofty ignorance.

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By Dib
to Anonymous1975
17th Dec 2018 13:07

You and possibly the other accountants are responsible for making and perpetuating the error (as you fully accept). However, in terms of cash, you are not responsible for paying the EA as that is the companies' liability. You may be responsible for interest but, again, possibly not as the companies have had the use of the money/lower overdraft than would have been the case if the error had not happened. You will be responsible for any penalties but, if the companies have not had tax errors in the recent past which resulted in more tax due from them, the penalties could be suspended. This assumes that you can't make a case for zero penalties.

A lot will depend on how you approach HMRC so it is worth taking great care in the approach and maybe paying someone knowledgeable in the area for advice on the approach to take.

This is not a sales pitch as this is not my area of expertise but if you pm me I can let you have details of who I use and their background.

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