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Does the client have any recourse ?

Client went over VAT threshold in 2018 but was never told by accountant

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Hello all

I have just picked up a new client and have noticed that they should have registered for VAT in 2018.  Both sets of accounts prepared by previous accountant showed turnover in excess of VAT threshold but the client was not told that they needed to register (they have just carried on in ignorance).  Does my client have any recourse with the previous accountant?

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By Cheshire
23rd Mar 2021 16:16

TickTock wrote:

Hello all

I have just picked up a new client and have noticed that they should have registered for VAT in 2018.  Both sets of accounts prepared by previous accountant showed turnover in excess of VAT threshold but the client was not told that they needed to register (they have just carried on in ignorance).  Does my client have any recourse with the previous accountant?

Presumably not exempt income.

Its a legal question rather than an Accounting one.

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Replying to Cheshire:
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By TickTock
23rd Mar 2021 16:26

Thank you Cheshire, unfortunately not exempt income, I have been wracking my brain trying to think of reasons why nothing was said but haven't come up with anything!

I will suggest the client speak to a solicitor.

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Replying to TickTock:
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By Cheshire
23rd Mar 2021 16:56

[quote=TickTock]''I will suggest the client speak to a solicitor.''

I wouldnt, not at this stage, if at all, just suggest he follows the complaints process in his LoE.

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By Paul Crowley
23rd Mar 2021 16:27

Be aware he has just changed and you have one side of a story

Was he told 'you went over months ago' replied it has gone down since etc
then year 2 version was 'I will finish what I am doing but will no longer act unless you register' replied leave it to me I will sort it

Hence agent no longer acted

Trader has no responsibility and is trying to get you involved in getting at prior agent?

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Replying to Paul Crowley:
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By TickTock
23rd Mar 2021 16:29

Thanks Paul, you are right, I only have one side of the story. Client can't get hold of previous accountant and they have not responded to my professional clearance letter.

Client has been above VAT threshold since the original breach.

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By paul.benny
23rd Mar 2021 16:36

Although old accountant may have provided poor service by failing to inform client, it's unlikely there are provisions in the letter of engagement that put any obligation onto old accountant. Old accountant may have evidence that they told client to register; it's very difficult to show that they didn't so advise.

The responsibility to register is the client's.

More importantly (for you) what are you going to do with a client with VAT bill nearly as big as their annual turnover?

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Replying to paul.benny:
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By TickTock
23rd Mar 2021 16:46

Thanks Paul. The letter of engagement makes no mention of VAT at all. You are right, I don't know what happened before I became involved. I will have to suggest the client speaks to a solicitor & goes from there.

As for the VAT bill, that is a difficulty, especially in the current climate & the client is in an industry that has been heavily affected by the lockdowns (still working via Zoom though). I'm hoping HMRC may let them pay in instalments .....

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Slim
By Slim
23rd Mar 2021 16:43

I have a rule of never slinging [***] and not getting involved beyond what is professionally required.

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Replying to Slim:
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By Paul Crowley
23rd Mar 2021 16:52

Same here
Fix the problem and let client suggest who was at fault.
When blame comes from new agent on a matter that client should be aware of?
Client never heard of VAT and wondered what that set of words means?

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By OldParkAcct
23rd Mar 2021 16:57

Is this a company or sold trader?
Doesn’t effect the VAT position, but may effect how much is actually paid and whether it is worthwhile looking at whether the old accountant has any liability.
If it’s a company and suddenly there is a significant liability then insolvency may be the only viable solution, in which case not worth the effort of looking at who is to blame.

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Replying to OldParkAcct:
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By TickTock
23rd Mar 2021 17:03

Thanks OldPark, it is a company. Good point re insolvency.

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Jason Croke
By Jason Croke
23rd Mar 2021 17:04

As others have posted, it's difficult to make an accusation as you don't have all the facts. My general approach is not to assume the previous advisor has made a mistake, they might be wrong but there might be a logic as to why they reached a conclusion, equally, they might be right for a reason not obvious from just looking at a set of accounts.

What is the activity of the business, could their income be outside the scope of VAT? What is it that they can now do on zoom now that they are locked down, sounds like consultancy/training or something arty/musical?

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Replying to Jason Croke:
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By TickTock
23rd Mar 2021 17:07

Thanks Jason. I have been trying to think why the business would not have to register for VAT but haven't come up with anything! It is a gym/PT run through a company ....

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Replying to TickTock:
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By OldParkAcct
23rd Mar 2021 17:33

Most gyms also rent out the room/space to other businesses, so would be surprised if there is no exempt income.

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By DaveyJonesLocker
23rd Mar 2021 17:16

I would never be as quick to tell somebody to go and see a solicitor, you never have the full story and I wouldn't be so quick as to put blame nor mud-sling at someone in my profession.

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By Matrix
23rd Mar 2021 17:23

You have said the supplies are not exempt or outside the scope but could the client have been treated as an agent? Just asking.

I would worry more about how to work out the VAT due, how to approach HMRC and how to get paid. I would send a proposal to the client and make sure they paid me (upfront) and rectified their compliance before spending money on solicitors.

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Replying to Matrix:
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By TickTock
24th Mar 2021 15:51

Thanks Matrix, I have double checked the agent option and it's not.

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By Roland195
23rd Mar 2021 19:49

I don't know why you are so keen to get a solicitor involved before you havr established the basic facts and even beyond that it's not likely to be a helpful experience.

How far in excess of the threshold is it? Is there a viable business left after VAT is deducted?

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Replying to Roland195:
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By TickTock
24th Mar 2021 15:58

Thanks Roland. Y1 & Y2 were under threshold, Y3 was £30k over and Y4 £50k over - not insignificant sums! Viability is an issue...

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Replying to Roland195:
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By TickTock
24th Mar 2021 15:58

Thanks Roland. Y1 & Y2 were under threshold, Y3 was £30k over and Y4 £50k over - not insignificant sums! Viability is an issue...

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By Carole Baldwin
24th Mar 2021 09:19

Option 1. The previous accountant DID tell them and they ignored him. Following year previous accountant discovered he had been ignored and told them to go elsewhere.

Option 2. The client did not know he must register for VAT and, having seen 2 sets of accounts over the VAT threshold, is demonstrably thick. Do you really want a client that stupid?

Either way the client owes the VAT & penalties. It's HIS problem to then try to reclaim it from the previous accountant. He has no chance, a court might award him the late payment penalties but it cannot make an award for the actual VAT as that is the client's debt.

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By Duggimon
24th Mar 2021 10:01

There's no point going to a solicitor before sorting the VAT out. Any recourse against the former agent, if they are at fault, is limited to the actual loss to the business.

The VAT they owe is not a loss to the business, if due it was always due. The only loss is whatever penalties HMRC apply which, if an unprompted backdated registration is made, might be nothing.

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By I'msorryIhaven'taclue
24th Mar 2021 11:38

I have a similar case. What justification is there for the old accountant having filed accounts containing gross figures, knowing that these were overstated and would need to be revised and resubmitted with net of VAT figures post-registration?

In my case I never filed such overstated accounts with HMRC, for fear of *running out of time to revise them; plus I didn't want to disincentivise the client from facing up to the matter.

* Talk about know your client! Two years plus down the line I'm still waiting for the director to provide information to deal with the matter.

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Replying to I'msorryIhaven'taclue:
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By Paul Crowley
24th Mar 2021 11:48

No such delays when there is a refund due though

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Replying to I'msorryIhaven'taclue:
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By Roland195
24th Mar 2021 11:49

I can only think that the previous agent knows or thinks something that we do not otherwise I agree it seems utterly foolish to actually file the accounts like this.

Exempt income perhaps but unlikely to be the case - few gyms or studios would be let in a manner that would qualify.

If it's only marginally more than the registration threshold they may have been planning on throwing themselves at the mercy of the VAT office (who would laugh in their faces no doubt) but God loves a trier.

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Replying to Roland195:
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By TickTock
24th Mar 2021 16:00

There is a tiny bit of exempt income but the majority is gym subs/classes. I would be happy if it were marginally over the threshold (see my reply above)!

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Replying to TickTock:
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By Roland195
24th Mar 2021 16:09

If the client is sticking with the story of being blissfully unaware of the VAT threshold, what brought them to your door?

What sort of gym is it? Have they had substantial capital expenditure /leased assets?

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Replying to Roland195:
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By TickTock
24th Mar 2021 16:17

An existing personal tax client has recently become involved in the gym (without advice from me in advance) and they have been trying to contact the accountant without success.

They have had a reasonable amount of capital expenditure and have recently purchased some more so that could be the lifesaver.

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Jason Croke
By Jason Croke
24th Mar 2021 18:36

1. If registering for VAT, they can of course reclaim input tax from the date they are registered plus the usual 6 months for services/4 years for goods. So you need to get those purchase records.

2. Treat the income historically as gross, so the VAT comes from the money already earned, then amend the filed accounts to reflect the lower turnover and potentially lower profit and corporation tax.

3. Consider flat rate scheme as it may make the VAT liability lower, but i) can't reclaim VAT from registration date but you can still reclaim pre-reg input tax and ii) might be a low cost trader and so having to use 16.5% rate and not worth using flat rate after all.

4. The quicker you do it the quicker the client makes an unprompted disclosure to keep the penalties low.

5. Time to pay agreement in place to pay least amount back over the longest possible time.

The above is what I'd do first, I'd worry about the old Accountant last.

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Replying to Jason Croke:
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By Carole Baldwin
24th Mar 2021 19:39

Alternatively just dump him and let someone else have the grief. Some clients just are not worth having.

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Replying to Carole Baldwin:
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By Matrix
24th Mar 2021 20:15

Agreed. A prospect who blames such a huge commercial error on someone else and whose first thought is recourse would definitely not be my ideal client.

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Replying to Matrix:
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By Paul Crowley
24th Mar 2021 20:49

+1
If you make any mistake client will want free accountancy for 6 years
(ref a prior thread)

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Replying to Matrix:
By Duggimon
25th Mar 2021 09:36

Matrix wrote:

Agreed. A prospect who blames such a huge commercial error on someone else and whose first thought is recourse would definitely not be my ideal client.

There's nothing in the thread to suggest this was the client's reaction, I read it as being the OP's.

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Replying to Duggimon:
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By DaveyJonesLocker
29th Mar 2021 15:00

Yes it’s the op who wants to go running off to a solicitor without having all the facts

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By I'msorryIhaven'taclue
26th Mar 2021 15:51

Having re-read the thread, I still have a niggling doubt:

Is it technically correct to file accounts which contain gross income figures, until *such time as the client registers for VAT?

*Whereupon those gross accounts / tax return can be replaced by net of VAT accounts.

The alternative of filing net (of VAT) income figures in anticipation of the client registering for VAT is IMHO flawed thinking because (i) who knows whether they'll **ever get round to it; and (ii) who knows to what extent HMRC will allow backdated input VAT to offset the output VAT accrued?

* *and if a reticent client never does get round to registering for VAT, would you not be exposed to a potential accusation of having artificially and wrongfully understated their income tax / corp tax liability?

So what's technically correct, and would you do? File nothing whatsoever? File net of VAT accounts figures, in anticipation of the client VAT registering? Or file gross accounts figures as an interim measure?

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Replying to I'msorryIhaven'taclue:
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By I'msorryIhaven'taclue
29th Mar 2021 14:52

Rather than hi-jack this thread with what amounts to a spin-off matter, I've posted my Q to a new thread.

https://www.accountingweb.co.uk/any-answers/filing-gross-accounts-pendin...

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