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SAS302 Ethical?

Client wants to show no expenses for higher mortgage

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We have a client who is looking for a first morgage. He is proposing to just show his CIS income and no expenses on his 2021 tax return to get a higher mortgage even though his tax bill will be higher. Surely we can't sign off on this as it won't be a true reflection of his income.  I would welcome subscribers thoughts on this.

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By Wanderer
13th Apr 2021 07:37

0098087 wrote:

I would welcome subscribers thoughts on this.

It's fraudulent.
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Replying to Wanderer:
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By jonharris999
13th Apr 2021 08:00

+ 1

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By 0098087
13th Apr 2021 08:08

Thanks. Pretty much what I thought!!

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By 0098087
13th Apr 2021 08:09

Hearing more and more about mortgage brokers encouraging this sort of thing

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Replying to 0098087:
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By paul.benny
13th Apr 2021 08:40

I think I'd be inclined to shop to FCA a broker advocating this. Not only is it fraudulent, the resultant higher tax is so clearly against the client's interest.

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Replying to 0098087:
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By lesley.barnes
13th Apr 2021 09:08

I would report a mortgage broker who suggested this as well providing I had evidence and it wasn't just the client say this. As other have said it is fraud you would be assisting the client get a mortgage that they may not be able to afford when all their expenses are taken into account. There is also nothing stopping the client amending the tax return at a later date once they have the mortgage to include the expenses and reduce the tax.

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Replying to lesley.barnes:
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By Paul Crowley
13th Apr 2021 10:03

The problem would be evidence
Broker will not put it in writing or email

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Stepurhan
By stepurhan
13th Apr 2021 09:25

Fraudulent and also stupid. The whole point of doing a check on income is to ensure they can pay the regular payments. What is the point of getting a mortgage if you are likely to default and lose the house?

I could just about see the sense in not claiming capital allowances. There is some leeway in claiming capital allowances, and a single AIA claim could produce an artificially low figure compared to normal trading. Still debatable whether the higher tax bill is in a client's best interests though.

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By tom123
13th Apr 2021 09:38

Mind you, in the case of AIA it is just timing, I suppose - rather than omission.

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Replying to tom123:
blue sheep
By Nigel Henshaw
13th Apr 2021 11:12

tom123 wrote:

Mind you, in the case of AIA it is just timing, I suppose - rather than omission.

Thats a different issue, they are quite within their rights to not claim AIA to boost profits - perfectly legal and acceptable. What we are talking about here is deliberately declaring false profits.
Which btw makes a mockery of the mortgage system which should be based on accounting profits not taxable profits but thats a whole other discussion.

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Replying to NH:
Stepurhan
By stepurhan
13th Apr 2021 11:27

NH wrote:
Which btw makes a mockery of the mortgage system which should be based on accounting profits not taxable profits but thats a whole other discussion.

I suppose the argument is that taxable profits are "verifiable" as they can be confirmed by a third party (HMRC).

The fact that, excepting enquiries, HMRC just accepts the information they are given is presumably irrelevant to the mortgage providers. :-)

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Replying to NH:
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By Open all hours
13th Apr 2021 17:28

But then we would need a financial advisor, banker or similar to actually understand accounts. Those days are more or less over. Computer says....

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By GR
13th Apr 2021 09:39

Sounds like mortgage fraud.
Explain the situation to the client.
If the client disagrees, resign and move on.

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Replying to GR:
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By geoffmw1
15th Apr 2021 15:54

I agree with you. Your own reputation is at stake.

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Replying to GR:
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By geoffmw1
15th Apr 2021 15:54

I agree with you. Your own reputation is at stake.

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Replying to GR:
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By geoffmw1
15th Apr 2021 15:54

I agree with you. Your own reputation is at stake.

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Routemaster image
By tom123
13th Apr 2021 09:41

Ethical, to me = choosing one of a range of options, that may be slightly aggressive or conservative - but an arguable point either way.

Fraudulent = deliberate evasion with no basis in fact.

So, of course it is not ethical to act fraudulently.

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By I'msorryIhaven'taclue
13th Apr 2021 10:23

I'm going to play Devil's Advocate.

We all agree that it would be wrong, and in all probability fraudulent, if on the mortgage application form the client was to overstate his 2020 tax return income. However, if I've understood correctly, the proposal described by the OP is one whereby the client's mortgage application income matches his 2021 tax return income. So the client pays the additional tax, and any direct fraud (of overstating the SA302 income on the mortgage application) is avoided.

That leaves us with the subjective - the ethical, I suppose - matter of just how much and how many of his expenses the client wishes to waiver. We're told, by the OP, that the client would like to waiver all of those expenses. We're not told how much that amounts to. Are we talking about home to site travelling expenses? Claims for lunch allowances? A few loose tools that he's guestimated the cost of? His mobile phone that he uses for business once a year to call his accountant? See where I'm going with this ...?

Suppose the OP were to eliminate all the nebulous, questionable, and contestable expenses from the 2021 tax return, and hence the SA302, and limit allowable expenses to any accountancy fees (minus the personal tax element). Oh, and waiver any CA/AIA claims. Just how "fraudulent" would that be? (And OP, are you able to give us a ball park figure for expenses, I wonder?)

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Replying to I'msorryIhaven'taclue:
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By philaccountant
14th Apr 2021 09:43

We all know it's unethical, as the stated intent is to deceive in order to gain a perceived advantage. (The actual advantage in owing a property you can't afford is a different question.)

Whether he would get away with it (highly likely) is another matter. But why would you want to be associated with someone that would behave in this way?

And isn't this part of what we're supposed to be here for? Doing our best to stop the clients behaving in an unethical manner.

In isolation this action will likely have no consequences. But if thousands or millions of people were to take this sort of action, we've got another rerun of 2008 on our hands.

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Replying to philaccountant:
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By I'msorryIhaven'taclue
14th Apr 2021 10:43

I guess the hypothesis I'm putting forward is that it's a question of degree: to what extent does our protagonist plan to restrict his expense claims? And, as a subsidiary matter, how nebulous and applicable are those expenses in the first place? I'm arguing that some latitude exists.

So far as the ethics are concerned does his overall purpose - his ulterior motive - automatically render restricting expenses unethical? Or is there some leeway for him to legitimately waiver some of his regular expense claims - especially those that are unreceipted or otherwise unverifiable - as well as elect not to bother with AIA? To arrange his affairs to his best advantage, as it were.

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Replying to I'msorryIhaven'taclue:
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By Paul Crowley
14th Apr 2021 11:03

It is one year only, probably with Covid issues
If lenders look at just one year then more fool them
No turnover issues just expenses
And is the business paying motor and telephone that an employee is taking out of net pay?

Then consider equity
10% more risky than 50%

But all this really is the responsibility of the lender

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By Paul Crowley
13th Apr 2021 10:36

Is the most recent figure the only figure the lender considers?
Daft taxpayer
Should really have produced records showing much less costs than normal

The request to 'show a high profit' is getting to be common
probably 4 last year

Compete opposite to normal client behavior

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By Carole Baldwin
13th Apr 2021 11:23

By understating expenses and therefore paying too much tax they are not defrauding HMRC, indeed the opposite as they are paying more tax than they need to.
However, by claiming to have more available income than they actually have they are making false representations to the mortgage company.
There is also the risk that seeing vastly reduced expenses HMRC may just decide to ask questions about previous claims for expenses going back several years.

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By New To Accountancy
13th Apr 2021 11:34

I've read this question on here before, unsure what the name of the thread was unfortunately.

Generally the same answers and conclusion was, it is mortgage fraud, deflating expenses is just as bad as inflating.

Yes the client pays more tax (which I suspect is the reason why it is questioned - that's a good thing, right?) but it is in order to obtain a mortgage by 'deception' (for want of a more fitting word). Take the mortgage application out, and this would not happen.
If it doesn't 'feel' right to you, that's your reason to know, it's probably not.

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Replying to New To Accountancy:
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By Southwestbeancounter
13th Apr 2021 14:32

Agreed 'New To Accountancy' and also the increased profits will only be for one year but the mortgage potentially offered on the basis of those increased profits might be over 25 years.

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A Putey FACA
By Arthur Putey
13th Apr 2021 11:41

If mortgage lenders really wanted to make risk based decisions based on affordability, they would demand 3 years worth of bank statements so they could scrutinise the spending habits of the applicant. There wouldn't be many mortgage offers though and the housing market would probably collapse.

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Replying to Arthur Putey:
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By Open all hours
13th Apr 2021 17:30

Unless the mortgage repayments are lower than the rent which has been met for years. This seems to be increasingly the case.

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Replying to Open all hours:
A Putey FACA
By Arthur Putey
14th Apr 2021 11:00

Well they could take that into account if they wanted to.

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By 0098087
13th Apr 2021 12:02

Thanks for all the replies. Confirmed pretty much my view. Will be writing to the client shortly. Will post update!

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Replying to 0098087:
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By I'msorryIhaven'taclue
13th Apr 2021 12:29

I have a post in the pipeline that I made some hours ago when there were only around half a dozen comments- under moderator review because after it published I edited a typo (just one - I changed FYA to AIA) and upon resubmit off it went into Moderator Cyberspace.

When eventually it republishes at around 5pm this afternoon it'll look pink and incongruous, and you'll be wondering what yours truly has been sniffin' to post such a contribution many hours after the thread has disbanded, and on a topic that will have been covered by others in the interim.

Pah!

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Replying to I'msorryIhaven'taclue:
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By Paul Crowley
13th Apr 2021 12:36

It used to be just calculatorboy
But the infection is definitely spreading

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Replying to Paul Crowley:
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By I'msorryIhaven'taclue
13th Apr 2021 13:09

Long after the matter had been resolved Calculatorboy and ISIHAC continued to debate, thus making a mockery of those who had labelled them the We couldn't care less contributors.

It's the block pink that rubs salt in the wound. It's so wussy! Pink and incongruous - which thought has transported me to a beach; looks like it'll have to be East Devon this year, even though its local council has already told toursists to b*gger off. Anyone here planning to venture abroad?

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By 0098087
13th Apr 2021 13:13

Client has now realised and is sending details of expenses!

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Replying to 0098087:
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By Paul Crowley
13th Apr 2021 13:28

Result

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Replying to 0098087:
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By I'msorryIhaven'taclue
13th Apr 2021 13:58

He's CIS, so if he's a tradesman you could always encourage him to declare some of his cash jobs that he does on weekends :)

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By 0098087
13th Apr 2021 14:04

They do cash jobs?

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Replying to 0098087:
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By I'msorryIhaven'taclue
13th Apr 2021 14:08

Only on weekends!

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Replying to I'msorryIhaven'taclue:
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By Carole Baldwin
14th Apr 2021 14:54

You have some idle clients, mine are at it all the time. How else do they drive new BMW's and declare 50p a year income.

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By kealy
13th Apr 2021 14:14

Halifax will essentially treat CIS workers as employees, they do not require SA302's, they work off the last 3 months invoices and CIS statement, assuming that is that they are contracted to one company.

Natwest will also do the same but they require a years worth of invoices and statements.

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By More unearned luck
13th Apr 2021 15:20

Your query reminds me of the case of Joseph Okolo who filed fictitious tax returns as part of an attempt at mortgage fraud then wished he hadn't. Not as relevant as it sounds to your query but nevertheless a Good Read.

https://www.bailii.org/cgi-bin/format.cgi?doc=/uk/cases/UKUT/TCC/2012/41...(title:(+OKOLO+))

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Replying to More unearned luck:
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By Paul Crowley
14th Apr 2021 11:05

Just read it
interesting

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Replying to Paul Crowley:
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By taxinfo
15th Apr 2021 18:10

Wow.

All I can say is I have never read a tax case like it (and I've read plenty over the years).

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Replying to More unearned luck:
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By Software Seeker
21st Apr 2021 10:50

Brilliant read. And the UTT allowed his appeal!

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Lone Wolf
By Lone_Wolf
13th Apr 2021 15:29

Showing no expenses is probably unethical. However, if the client is saying that his expenses were not incurred wholly and exclusively for the purpose of the trade, and therefore not deductible for tax purposes, that's different I'd say.

Of course the detail behind the return should show those expenses being incurred, and subsequently disallowed, to provide clarity to any interested party. The Self Employed pages of the return allow for this detail to be entered, showing the net profit in Box 47. The profit for tax purposes (after any disallowed expenditure) will flow through to Box 64, and will be different from Box 47 (and it will be the Box 64 figure in the SA302).

If the tax return is provided along with the SA302 to the mortgage provider, I don't see any ethical issues. If they are accepting a SA302 as proof of income, then I'd say it is on them to understand the nuances of how a SA302 is calculated, and that it may not reflect actual income. Providing the supporting tax return means he is providing the necessary information for them to see that his profit for accounts is different for his profit for tax.

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Replying to Lone_Wolf:
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By Wanderer
13th Apr 2021 15:39

Oh come on! You just going to accept that 100% of the expenses are not allowable just because the client says so? With the background knowledge that client is going to use SA302's & TYO's to fraudulently obtain a mortgage?

Absolutely no way I'd be involved with a return on that basis.

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By rmillaree
13th Apr 2021 18:16

slightly different but similar themed question.

Presuming a sole trader is eligible to use the trading income allowance - and they choose to go down that route - and therefore then aren't allowed to claim any expenses. Is there anything unethical going down this route if that results in higher profit than would be declared by the normal method? if that higher income is useful say for sa302 purposes?

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Replying to rmillaree:
blue sheep
By Nigel Henshaw
13th Apr 2021 19:07

rmillaree wrote:

slightly different but similar themed question.

Presuming a sole trader is eligible to use the trading income allowance - and they choose to go down that route - and therefore then aren't allowed to claim any expenses. Is there anything unethical going down this route if that results in higher profit than would be declared by the normal method? if that higher income is useful say for sa302 purposes?

Now we have a question!

You could quite legitimately have a trader that has kept no record of expenses and is quite happy to claim the allowance instead, however thats not what we are talking about, what you are saying is that a deliberate choice is made to suppress profits in order to obtain a higher mortgage so it still feels off to me even though you could do it with no comeback.
On the other hand why is this any different to choosing to not claim AIA for example?

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Replying to NH:
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By rmillaree
13th Apr 2021 20:36

" however thats not what we are talking about"
Yep that was kind of my point different question completely - just thought i would chuck it into the mix to spice things up a bit. To be fair to me its not a completely off topic point/question :)

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David Ross
By davidross
14th Apr 2021 09:59

Sometimes people post really dumb questions here which open themselves and their firms up to the attention of the authorities.

"0098087" might seem anonymous, but it also says "Lewis and Co" against the picture of a cat - busted?

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Replying to davidross:
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By 0098087
14th Apr 2021 10:15

Just the user name, never changed it. No reason to be a secret. There was no way I was ever going along with this nonsense. Client would have been told to sling his hook

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