I would appreciate thoughts on how HMRC may approach the following?
new client walks in off the street. hasn't filed tax returns for 5 year.
he is not vet registered, although he should have been from 2006.
I estimate the VAT arrears are £300k, plus interest plus penalties.
he only has £75k of cash with no other assets.
his income tax position is reasnbaly up to date - he had been paying £5,000 lump sum every now and again which has helped.
We advised that we have an obligation to inform HMRC of the late vat registration and he accepts this.
he does want to do the correct thing. i think he has had some personal issues during the past few years, hence the position he now finds himself in.
he would like to pay what is owed but realistically this might not be possible.
his turnover is £300k pa and his trading profits are c£70k per annum. his business is arranging private tutoring (not tutoring personally).
any thoughts how you think HMRC will react when he comes clean.
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I think they'll have a field day & his £75k.
Why has he suddenlt decided to come clean? Has he been sent SAR's instead of just paying lumps on a/c? If not it may be partly HMRC at fault,which could mitigate the penalties
He has to come clean with HMRC on both taxes and attempt to strike a deal before they come to him on discovery.Once you have established the full ramifications it might be sensible to talk to an IP
Get some fees up front
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I honestly think he hadn't appreciated the VAT registration. It was a genuine error and I can understand becasue its an easy misunderstading to make for the lay person.
He simply ignored his income tax responsibilities. He would guestimate his exposure to income tax and nic and make payments without filing returns.
he moved address in that time so HMRC couldn't make contact with him.
he has a profitable business but I agree that he may well need to seek advice from an IP.
Does he need to pay VAT ?
You say he provides private tutoring? Education is exempt, so, if he is actually providing vocational training it might be worth exploring that possibility.
"When vocational training is provided for what’s termed for an eligible body, the vocational training is exempt.
Vocational training covers training or re-training; and work experience for paid employment; or voluntary employment in areas beneficial to the community as a whole - education, health, safety, welfare, and charity work in general
Vocational training occurs where trainees attend courses, conferences, lectures, workshops or seminars and the purpose is to prepare for future employment; or to add to their knowledge to improve their performance in their current work
An eligible body is a school, university, sixth form college, tertiary college or further education college or other centrally funded higher or further education institution (defined as such under the Education Acts)"
It rather depends on what you mean by providing tutoring, and what kind of tutoring.
Make an early disclosure to HMRC
I would suggest that you make an early disclosure to HMRC and offer a sizeable payment on account while you are continuing to calculate the arrears of VAT and Tax. It may be worth trying to get an early meeting with them which will help a future time to pay request. The penalty will be reduced if you make a disclosure to them first.
We recently secured a time to pay offer with the direct tax of several years but be aware the VAT debt management unit will often take a different view. If you can get the local office on board it will assist any time to pay negotiations.
Don't forget to cover your fees.
If your client has no hope of paying the arrears, penalties and interest then bankruptcy may be the only solution.
Malcolm McFarlin
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djp
we have looked at this in a lot of detail.
he has been acting as an undisclosed agent and been collecting full tuition money from parents and paying the tutors without any paperwork invoices or contracts.
his own private tuition is exempt but thats not much
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malcolm
thanks for sharing your experience.
we need to regroup and give a summary of the total exposure and the options.
a discussion with an IP is most likely.
At this moment in time he is off the radar for VAT but it is only a matter of time.
i guess that should he walk away we will need to have a think about AML report.
Just another point you say his only asset is £75k cash. Does he not own a house/car etc.
If you take him as a client be prepared for a lot of agro if he's operating without any paperwork with a £300K turnover
Perhaps you should walk away unless a large fee up front is paid
The AML point
When considering whether you are obliged to make a report do not overlook the exception for information received in "privileged circumstances", which may apply here. If it does apply then you should NOT file an AML report (irrespective of whether he makes full disclosure to HMRC or walks away).
David