Sole Trader Tax Return

typical sole trader tax return problem- profit too little

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I agreed to do a tax return for a uncle's friend who does some general building works ( sole trader ). I dont work in practice, i work in industry but just wanted to help him do the return just to get an experience - as i am thinking maybe i can do a little side business in the future- doing simple tax returns for friends and relatives. 

His tax return was done by his local firm last year- and my plan was to look at last year's return to get some insight on his business/expenses and do it for him. But looking at his last year's return- even though it was done by a person working for a firm- does not look convincing.

His revenue was aroung 54k and expenses around 50k giving only 4k profit!. Prev tax year he also had a job which took up his personal allowance. so he paid tax on his profit. But this time he only has worked as self employed. His income is very similar around 55k and expenses around 50k, which means there is no tax to pay!

I thought doing sole trader return would not be problem but seems not very likely. He says he does not deposit cash payments into his work account, uses it to pay bills or deposit to some one else's account- i am not sure. He says his expenses in his bank account which he uses are all genuine except few. 

So on my analysis, his profit are understated because of him not including cash payments. I could either look into his expenses receipts and try to reduce them by leaving out some expenses? So that he has some profit taxable so he does not get into trouble? I have suggested him he need to put the cash income into his work account, but i can do nothing about the past. So not sure how do i sort this. Even if i do this, his profit will not match with previous year where he has similar revenue. 

Last year was his first time doing sole trader return. Looking at his last year's return- who ever did the return did not do it properly even if it was done via a firm? which makes me question the integrity of the one who did it. Or i could be judging them wrong?

I do not want him to be in future be in tax man's enquiries so would like to offer him best advise on what he needs to do? Experienced ones can you suggest me how to go  about this? 

I am thinking most of the readers will suggest ask him to go to the firm, but this thing just got me more curoius and i want to know how to solve these kind of problems for my learning experience. Any brief suggestion would be appreciated. I think most sole traders want to pay less tax and hide incomes- and even local accountants in firms seem to encourage them( by not correcting thier mistakes )- judging by his previous tax return

Even if i suggest him to go to a firm- i want to be able to advise him on how to overcome not being penalised by hmrc jugding by his previous return. Only way he pays some tax is if i reduce his expenses. or he pays no tac this year, and when he starts inlcuding his cash income correctly into his work bank account this year- he should be able to pay tax next year when all his incomes show properly. That way his profit from last return would not look way off comparing to the revenue? Or reduce his expense this return- but then his expenses will be too low this return compare to last time and will again be high the following tax return. Very confused- 

I am sure hmrc will be linient on first time returns? 

 

Replies (23)

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By Paul Crowley
19th Oct 2020 10:44

Last year the accountant used his records
Sounds like his records are rubbish
Get out while you can

Why is there no record of cash received?
Why are other people's accounts being used?

By the way
Bad record keeping is NOT typical. It is the exception

Your comment that accountants in practice are encouraging tax evasion is the first ever post on this platform that I find offensive

Thanks (2)
Replying to Paul Crowley:
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By Tax Dragon
19th Oct 2020 10:57

It's accountantism.

Bad ones exist, so all must be bad.

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Replying to Tax Dragon:
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By Paul Crowley
19th Oct 2020 11:04

Always the accountant wrong
Never the friend with dishonest records

Cash received, no cash records

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By Wanderer
19th Oct 2020 10:56

Quote:
Sole Trader Tax Return
typical sole trader tax return problem- profit too little

I agreed to do a tax return for a uncle's friend who does some general building works ( sole trader ). I dont work in practice, i work in industry but just wanted to help him do the return just to get an experience - as i am thinking maybe i can do a little side business in the future- doing simple tax returns for friends and relatives. 

His tax return was done by his local firm last year- and my plan was to look at last year's return to get some insight on his business/expenses and do it for him. But looking at his last year's return- even though it was done by a person working for a firm- does not look convincing.

His revenue was aroung 54k and expenses around 50k giving only 4k profit!. Prev tax year he also had a job which took up his personal allowance. so he paid tax on his profit. But this time he only has worked as self employed. His income is very similar around 55k and expenses around 50k, which means there is no tax to pay!

I thought doing sole trader return would not be problem but seems not very likely. He says he does not deposit cash payments into his work account, uses it to pay bills or deposit to some one else's account- i am not sure. He says his expenses in his bank account which he uses are all genuine except few. 

So on my analysis, his profit are understated because of him not including cash payments. I could either look into his expenses receipts and try to reduce them by leaving out some expenses? So that he has some profit taxable so he does not get into trouble? I have suggested him he need to put the cash income into his work account, but i can do nothing about the past. So not sure how do i sort this. Even if i do this, his profit will not match with previous year where he has similar revenue. 

Last year was his first time doing sole trader return. Looking at his last year's return- who ever did the return did not do it properly even if it was done via a firm? which makes me question the integrity of the one who did it. Or i could be judging them wrong?

I do not want him to be in future be in tax man's enquiries so would like to offer him best advise on what he needs to do? Experienced ones can you suggest me how to go  about this? 

I am thinking most of the readers will suggest ask him to go to the firm, but this thing just got me more curoius and i want to know how to solve these kind of problems for my learning experience. Any brief suggestion would be appreciated. I think most sole traders want to pay less tax and hide incomes- and even local accountants in firms seem to encourage them( by not correcting thier mistakes )- judging by his previous tax return

Even if i suggest him to go to a firm- i want to be able to advise him on how to overcome not being penalised by hmrc jugding by his previous return. Only way he pays some tax is if i reduce his expenses. or he pays no tac this year, and when he starts inlcuding his cash income correctly into his work bank account this year- he should be able to pay tax next year when all his incomes show properly. That way his profit from last return would not look way off comparing to the revenue? Or reduce his expense this return- but then his expenses will be too low this return compare to last time and will again be high the following tax return. Very confused- 

I am sure hmrc will be linient on first time returns? 

 

Although you may 'want to' you should stop advising him on anything, other than suggest that he contacts a suitably experienced firm of accountants.
Suggestions such as "I could either look into his expenses receipts and try to reduce them by leaving out some expenses?" & your penultimate paragraph display that you are way out of your depth and likely to commit fraud.
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By paul.benny
19th Oct 2020 10:52

Quote:
... I dont work in practice, ... i am thinking maybe i can do a little side business in the future- doing simple tax returns for friends and relatives. 

You might want to check the requirements of your professional body regarding practising certificates.

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By Paul Crowley
19th Oct 2020 10:58

HMRC have a permanent task force for the building industry
It is where significant tax fraud takes place

HMRC may wonder how he can afford to live?

If I were HMRC I would look at year 3 to make sure the enquiry was worth while, catch up all three years in one go

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By Tax Dragon
19th Oct 2020 10:58

This reads a bit like something Mr Bailey has been working on for about six months. (And IIRC that ties in with the last time we saw him.)

Worth the wait?

I'm not seeing it.

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By Moonbeam
19th Oct 2020 11:00

You may want to check your PI insurance. If you've got any, of course.

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paddle steamer
By DJKL
19th Oct 2020 11:07

What do you have for the expenses, do you have invoices, are they all paid from the bank or are some paid via c/card, cash etc? Have you analysed them by how paid?

What about invoices he issues, does he retain copies?

Is he within CIS, have there been deductions?

What sort of costs do you have, have you got them split by type, what sort of quantum of them are materials?

What sort/types of work does he do, is it high material cost ratio to labour (say fitting kitchens) or ought it to be more labour less materials?

Given this is possibly a very big can of worms which could impact multiple years do you have any idea how to approach the reconstruction of accounts from incomplete records ?

Have you yet seen all his private accounts, can you reconstruct how he lives, how he pays his bills etc?

Does the client lie, have you caught him out yet?

Do you carry PII?

Are you charging a fee?

Are you registered for ML?

Are you a member of a professional body, if so would they like you to do work for which you are possibly not trained?

Nothing like destroying someone elses's life whilst you learn on the job, hand it to a professional who knows what he/she is doing.

p.s. It may be, if whoever is appointed agrees, that you can do a lot of the donkey work/analysis that will be needed, but you need someone experienced to direct you, so if you want to keep a toe in the door maybe consider volunteering to do some of the mundane recording of transactions/analysis of private banks etc. (PS- tip- make copies of the private bank statements for your analysis so only they get marked, good chance HMRC will want to see the statements and you do not want to pass them your musings/scribbles/ticks)

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By SXGuy
19th Oct 2020 11:09

I think criticising the old firm, whilst asking if you should omit expenses to make him pay some tax is a bit ironic to be honest.

Nothing you can do about the cash payments? ever thought of asking for the amount of cash received in the year or even asking for his personal bank statements?

54k of income and 50k of expenses? sounds very dodgy to me! but I haven't seen what you have, so ill refrain from calling BS.

No Tax to pay? does your uncles friend have any children and claim child benefit by any chance?

With respect, you've picked the wrong type of client to gain some experience from and id respectfully suggest you hand this one over to someone else who's able to do it correctly.

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Stepurhan
By stepurhan
19th Oct 2020 11:16

You suspect that he has done something wrong (and it does sound likely) but your solution is to manipulate the figures further to hide this wrongdoing. This is hardly taking the moral high ground.

You thought you'd take on doing practice work despite having no practice experience. In some ways you are lucky coming across such a mess early on. Practice is very different from industry and requires a whole set of skills and knowledge you are unlikely to have.

You assume that "most sole traders want to pay less tax and hide incomes". In my experience most people do prefer to pay less tax, but by adopting legal means to do so. If you are thinking of doing any work assuming clients are generally dishonest, that is not going to go well for you.

Finally assuming HMRC will be lenient on first returns. You are dreaming if you think that is the case. They will only be lenient if you can clearly prove it was an innocent error that you are correcting by doing the figures right, not manipulating them further.

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Replying to stepurhan:
paddle steamer
By DJKL
19th Oct 2020 11:34

I doubt he has even got to the mess yet, in my experience once one starts tugging a loose thread further ones start appearing (CIS/PAYE/VAT etc), my worst being a local enquiry blossoming into Special Compliance and all sorts of other issues arising. X years later (I had left but heard the outcome) it became a 20 year settlement which, with interest and penalties was a >£400k bill (and that was in the late 90s, a lot of money)

p.s. I quite liked back duties/enquiries in a perverse sort of way though was never keen on dealing with ones for accounts I myself had prepared because by definition , if there was an issue, that meant you had missed something. At least re the one mentioned above I flagged the issues to the partner before the accounts were first submitted.

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Slim
By Slim
19th Oct 2020 11:26

This client isnt worth the effort, he knows what he is doing he wasnt born yesterday.

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By Andy556
19th Oct 2020 11:40

1) You can't change the past - yes you can
2) The firm would have done the accounts based off the information provided last year. They should query the high expenses.
3) If he didn't tell them about the cash income, how were they to know?
4) Are you really suggesting not including cash income and taking out expenses to make it look OK. It should be OK, not just look OK.
5) You are sounding like you are happy to commit fraud knowingly, I would not enter the accounting profession if I were you, you could get into a lot of trouble.

Edit - this has got to be a joke post surely for attention? It's too absurd to be real

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Replying to Andy556:
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By Tax Dragon
19th Oct 2020 12:01

Andy556 wrote:

It's too absurd to be real

A Mr Bailey tell-tale!

You can't change the past. You can correct how the past was reported. (Fake news!)

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Replying to Tax Dragon:
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By Andy556
19th Oct 2020 12:06

Yep, I meant you can change previous tax returns.

Would be impressive if you could change the past :)

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By Anonymous.
19th Oct 2020 11:59

Quote:

I dont work in practice, i work in industry but just wanted to help him do the return just to get an experience - as i am thinking maybe i can do a little side business in the future- doing simple tax returns for friends and relatives. 

Are you practicing within the rules of your professional body? Do you have adequate practical experience to carry out the work you are doing and plan to do?
Have you carried out the relevant MLR checks for this task and do you have PI Insurance?

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By lesley.barnes
19th Oct 2020 12:06

My suggestion is to hand back his paperwork such as it is and decline to be involved any further. If your uncle is saying that he didn't declare any cash income last year to his accountants when they did his tax return you have a money laundering issue.

Don't blame his accountants - none of us have a crystal ball. We can ask questions when something doesn't smell right but if the client gives a plausible reason there is a limit to how far we can dig. Your uncle signed off on his accounts last year knowing they were wrong - he was clever enough to hide money in other peoples accounts, that tells me he knew what he was doing. Ask your self why he has brought his accounts to you this year and not his accountants.

Depending on how much cash he has taken you have a possible VAT issue if the turnover exceeds £85k. Possible CIS issues - £55k + cash has he been subcontracting work? This isn't something that someone with no experience in dealing with HMRC should be touching.

You need to advise him to go through his bank statements, the bank statements of people he has deposited money in (they could be investigated for ML) and his diary/records. He needs to work out how much cash he has taken from when he started trading tax year by tax year. He then needs to go to an accountant and hold up his hands to what he has done. It won't be cheap - either in accountancy fees or HMRC taxes and penalties. He may also find some accountants won't want to because of trust issues or won't have capacity to take him on, we are entering the busy season.

Finally if you are an accountant in industry - you need to check with your accountancy body as to whether you have a responsibility to make a SAR. My sympathies this isn't a pleasant situation to be in.

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By Yossarian
19th Oct 2020 13:07

One question. Is his name Bob?

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Replying to Yossarian:
Red Leader
By Red Leader
19th Oct 2020 17:13

Don't malign Bob. Bob was a straight shooter.

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By jonharris999
19th Oct 2020 14:42

I MISS JERRY

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By Open all hours
19th Oct 2020 19:07

Consider stock and work in progress figures.
More seriously, consider handing it back and be grateful thereafter that it’s not your problem.

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By Cheshire
19th Oct 2020 20:45

''just wanted to help him do the return just to get an experience"

Work for an Accountancy practice to get some experience of how to do things properly, rather than completely incorrectly.

"i am thinking maybe i can do a little side business in the future- doing simple tax returns for friends and relatives."

What does your prof body say about ethics?

Stay away from family and friends tax and accounts. I say it all the time, it's an easy way to lose friends, or your house.

Sure you will now also be realising that there is rarely such a thing as a simple tax return.

I will hazard a guess that you have not signed up for AML and don't have PII cover.

So many issues, all covered by my learned awebbers.

Walk away.

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