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HMRC VAT determination - fraud

New owner faced with VAT bill linked to previous owner fraud

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Hi all. I have a client who acquired a business some time ago. A few months before her takeover, the business was visited by HMRC, and the investigation - VAT and Payroll, completed recently, with a massive VAT bill linked to the surrender of an asset to a related party by the previous owner (without Board approval). The asset surrender was hidden from HMRC by not disclosing through the accounts and not reporting as a disposal, therefore effectively evading VAT.

The current owner, in good faith, assisted HMRC wholeheartedly in their investigation and helped unearth the fraud, even launching an official complaint with the police's fraud squad.

What, if any, mitigation does my client have in view of the fact that she was not in any way party to the fraud and would the company still be liable to pay the VAT bill?

Any of you know any VAT specialists that may be able to help with the appeal/ defence? Any well establish consultant or firm that can assist with this?

Thanks.  

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By paul.benny
22nd May 2020 07:16

What did the client buy - company or trade? You mention lack of board approval, it sounds like the company was acquired. Was any due diligence carried out by a third party? What did the sale and purchase agreement say about pre-completion liabilities?

Whilst not directly the answer to your question, there are other parties who should be on the hook - the vendor, the buyer's legal adviser (for failing to include appropriate protections in the SPA). Before client starts spending much time and money on defence/mitigation, the other parties need to be brought into play.

The client needs legal advice on their possible recourse against other parties.

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Replying to paul.benny:
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By Cheshire
22nd May 2020 07:31

[quote=paul.benny '' Was any due diligence carried out by a third party? ''

Issue here though could be that if not picked up by due diligence, the issue was known to the new owner as she helped uncover the fraud pre purchase. Unless the timeline is not quite as it seems in the OP.

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Replying to paul.benny:
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By ISG022
22nd May 2020 12:16

Hi the company was bought as a going concern. I haven't read the purchase agreement fully but the lawyer tell me there are several indemnities in place. The due diligence report advised caution due to lack of information/ detail provided by the previous owner, but the deal went ahead anyway.

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Replying to ISG022:
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By Wanderer
22nd May 2020 12:22

Due diligence reports always advise caution!

Having said that, too often purchasers are too focused on getting the deal done and thinking about the excitement of the future when they should be taking time to fully consider the terms of the deal, advice given and whether the guarantees will have any real substance in practice.

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By Cheshire
22nd May 2020 07:31

ISG022 wrote:

Hi all. I have a client who acquired a business some time ago. A few months before her takeover, the business was visited by HMRC, and the investigation - VAT and Payroll, completed recently, with a massive VAT bill linked to the surrender of an asset to a related party by the previous owner (without Board approval). The asset surrender was hidden from HMRC by not disclosing through the accounts and not reporting as a disposal, therefore effectively evading VAT.

The current owner, in good faith, assisted HMRC wholeheartedly in their investigation and helped unearth the fraud, even launching an official complaint with the police's fraud squad.

What, if any, mitigation does my client have in view of the fact that she was not in any way party to the fraud and would the company still be liable to pay the VAT bill?

Any of you know any VAT specialists that may be able to help with the appeal/ defence? Any well establish consultant or firm that can assist with this?

Thanks.  

Thanks (1)
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By Wanderer
22nd May 2020 07:55

ISG022
Member Since: 22nd May 2020

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By memyself-eye
22nd May 2020 08:02

She retained the previous taxpayer's VAT number then?

If so, Oh dear.

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Replying to memyself-eye:
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By Dib
22nd May 2020 13:08

If she purchased the shares in the company what choice did she have - it is the company that is registered for VAT, not the shareholders!

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My photo
By Matrix
22nd May 2020 09:09

No mitigation for the VAT bill, maybe against penalties. However it is not a VAT expert you need but to go over the sale and purchase agreement as advised and see if there is recourse to the seller (usually in a section on Indemnities). If not then recourse to the lawyers for omitting such a clause.

It’s a shame you weren’t as diligent in uncovering this mess when you bought the business as you were in wholeheartedly helping HMRC.

I also think it is a bit late to bring in a specialist. Use the adviser who helped in the investigation to try and mitigate the penalties. If you dealt with HMRC unrepresented then that was another mistake.

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By bernard michael
22nd May 2020 10:47

Was the purchase price artificially low due to the fraud, which by the comments in your question should have been included in the deal and known about :-
"a few months before her takeover visited by HMRC"
It's obvious to any idiot that there was a problem
OR
Is she now trying to get the fraudster to pay twice
Once in the low purchase price and now the final HMRC bill
Her chances of winning an appeal I would say are probably zero when considering the above
It's not HMRC,s fault if she didn't cover herself. Whether her advisors can be made to carry the can is a separate issue

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By Tim Vane
22nd May 2020 11:16

Never seen an SPA that didn’t cover for this sort of shenanigans in the warranties. Definitely needs a call to the buyer’s legal reps. Caveat emptor.

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RLI
By lionofludesch
22nd May 2020 11:25

I'm saying nothing - beyond that there's a lot of jigsaw pieces missing.

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By memyself-eye
22nd May 2020 12:12

I bet like many folks buying a business, she did the deed without anyone advising her and only then thought about appointing an accountant.....

50p says I'm correct!

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Replying to memyself-eye:
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By ISG022
22nd May 2020 12:21

Congratulations! You are 50p richer.

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Replying to ISG022:
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By memyself-eye
22nd May 2020 19:00

Great - trouble is there is nowhere open to spend it....
(well non of the establishments I usually frequent)

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By fawltybasil2575
23rd May 2020 14:19

@ ISG022 (OP).

In intending no offence to you or to previous responding posters, I would certainly not necessarily dismiss the possibility that a VAT specialist, and indeed also a company lawyer, be engaged, arising from one potentially key aspect, not previously commented upon in detail above. I refer to your words:-

“ . . . a massive VAT bill linked to the surrender of an asset to a related party by the previous owner (without Board approval). The asset surrender was hidden from HMRC by not disclosing through the accounts and not reporting as a disposal, therefore effectively evading VAT”.

Whilst making no assumptions as to the transaction(s)/purported transaction(s) to which the words “surrender to a related party” refer, I would certainly wish to establish the specific events re those transaction(s)/purported transaction(s).

If, as appears quite possible (albeit not definite) at issue is the (purported) disposal to the “related party” of a substantial company asset (in respect of which “VAT” has been shown on the sales invoice) one must investigate whether any such disposal has IN REALITY taken place. If, as but one example, the related party supposedly acquiring the asset knew, or ought to have known, that the supposed “purchase” was not a valid transaction, then (regardless of whether, as is possible, such party claimed the “VAT” shown on the transaction invoice), quite possibly such “transaction” might require legally to be VOIDED: consequent thereupon, the “VAT” shown on the, as would then be established, invalid supposed “VAT invoice”, would rightly be required to be excluded from the records of the “related party”. Such in turn would rightly also validate the inclusion (which currently is the case) of that asset in the company’s Financial Statements.

One thus needs more information, as to the (supposed) “surrender”, to enable one to provide more detailed comment. Suffice to however say that if my postulation referred to above, or indeed any similar explanation of the circumstances re the “surrender”, is valid (and consequently requires the “surrender” to be voided) then, quite possibly, an entirely different approach might be required in respect of taking action re the acquisition of the shares in the company – for example, HMRC might then abandon seeking monies from the company; and instead seek monies, including penalties, from the “related party”.

Basil.

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