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VAT Reg nightmare

VAT Reg nightmare

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Client had a VAT inspection. It turns out VAT EDR should have been 2 years prior to what it was. Under FRS for the period, client now owes £20k. Profit per annum is ~£30k. Client is now a Ltd Co but was sole trade at the time of VAT registration (VAT number TOGC, so liability for £20k lies with Ltd Co).

We took this client on at about the time they actually registered for VAT. Previous accountant is known to be somewhat dubious, and on the face of it he has clearly failed to advise our client correctly (he has no professional body membership).

My immediate thought is £5k for formal insolvency is cheaper than £20k VAT - it will take the client years to pay that off, if indeed HMRC would allow that. Would an insolvency practitioner have more clout to be able to pursue the previous accountant for negligence, if that turns out to be the case?

Any other pearls of wisdom? Frankly, I'm dumbfounded by the extent of this, and just so upset and cross for my client.

Thanks.

Replies (19)

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By rjoconnor81
03rd Mar 2014 12:37

I would see if there is anyway to re-coup from clients at that time, if they are still clients and VAT Registered they might be happy to be invoiced for the amount and claim back themselves through there own VAT returns.  I have seen this done, but obviously not everyone was willing or able too (private individuals).  When we organised it for a client VAT invoices were raised and it was agreed that they could pay at 3 months (at this point most, if not all would have done their next VAT return so would have had the benefit of the VAT).  

 

Also we never transfer a VAT number from one entity to another, under a TOGC you can choose to have a new VAT number.   

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
03rd Mar 2014 12:46

Thanks.

It's a retail business so no way of recovering VAT.

I don't know offhand, but surely just ceasing to trade and deregistering from VAT wouldn't absolve a trader of a mistake like this? The fact that we TOGC'd the number means he now has no personal liability and is protected by the Ltd Co, whereas if we'd left it, he would be personally liable - unless there is a gaping loophole there!

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By Malcolm McFarlin
03rd Mar 2014 13:17

Security for new co

Don't forget that HMRC have the power to ask for security or a deposit equal to the loss of tax if the new company attempts to re-register for VAT.

Can you make an adjustment to the corporation tax/ self assessment tax returns as a result of the loss in profits which may assist?

Malcolm McFarlin

www.mandrtaxadvisers.com

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By petersaxton
03rd Mar 2014 13:19

FRS?

Their VAT wouldn't be calculated using the FRS as they didn't apply until later.

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By Peter Bonetti
03rd Mar 2014 13:32

Sole prop at the time

I would have thought the error was with the sole prop (did the company even exist at the time?) so no amount of wriggling will absolve the guy of the responsibility and it is his responsibility.

 

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By DMGbus
03rd Mar 2014 13:56

Stock and assets

Under the FRS VAT should be reclaimed on stock and assets on hand at the date of registration, this claim should reduce the VAT liability (subject to 4 years rule).

Has the £20k alleged liability taken account of this claim?

 

 

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
03rd Mar 2014 14:17

Thanks all. 

Thanks all. 

 

What would you all do with regards the previous accountant? I don't want to get personally involved, but my client does have a right to go back to him and ask what on earth he was doing. Any advice on the best way to approach that?  Unless we can argue reasonable excuse, my client is looking at a 20% minimum prompted disclosure penalty. I realise that as he is unregulated it's pot luck whether he has PI insurance etc.

 

Malcolm - thanks, had forgotten about the security deposit - though in any event I doubt he will want to go into liquidation as long as he can arrange a reasonable payment plan.

Sadly the adjustment of SA tax is sadly already accounted for in my £20k figure.

Peter S: HMRC have said they are happy to use FRS as a basis of calculation (just reminded myself, 1% discount!) as opposed to reworking 2 years of bookkeeping. I've yet to decide what is going to be more cost effective for my client. The problem is I don't trust the previous guy's bookkeeping at all (we have independently confirmed turnover figures and EDR).

Peter B: Yes, but as the VAT number is transferred, all legal liability lies with the new owner, the company.

DMG: That's in my notes of extra stuff to look at - the £2k asset rule during FRS and pre reg input VAT.

 

 

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By bernard michael
03rd Mar 2014 15:20

Presenting his own bankruptcy petition will cost less than £1000. Why use and IR when the documentation is simple

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By Monsoon
04th Mar 2014 10:58

Bernard

Because the liability lies with the limited company, not him personally, as the VAT number is now the responsibility of the Ltd Co.

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Replying to SXGuy:
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By Cloudcounter
04th Mar 2014 12:32

Transfer of liability

Monsoon wrote:

Because the liability lies with the limited company, not him personally, as the VAT number is now the responsibility of the Ltd Co.

I'd be surprised if the transfer of the VAT number to the company absolved the sole trade of responsibility for debts arising on his watch.  I think that the transfer of number rules will mean that they are both liable.  Otherwise you could run up substantial arrears of VAT, transfer to a limited company and walk away.

 

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By Peter Bonetti
04th Mar 2014 11:09

No indemnity in the sale I presume

As it was sole prop selling to himself, in a manner of speaking, there is no obligation on him to pay any liabilities arising after the event in any sale agreement.

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
04th Mar 2014 13:25

HMRC say

Consequences of transferring a VAT registration number are legally binding on both parties and include the transfer of any VAT liability to the purchaser . The purchaser is liable for any outstanding VAT from the seller’s registration

 

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.por...

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
05th Mar 2014 12:17

Anyway, what I'm more concerned about is any advice on how to tackle the previous accountant who probably got him into this mess in the first place! 

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blue sheep
By NH
04th Mar 2014 13:34

how do you know it was the accountants fault?

Playing devils advocate - I presume you only have the clients word for it that the previous accountant didnt tell him?

The previous accountant may say differently

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By Roland195
04th Mar 2014 16:15

Also Devil's advocate

From what you have stated already, my supposition is that the ex-accountant advised the need for VAT registration on production of the years accounts, however this could have been sometime in arrears - A 5th April 2012 year end could have been presented to the accountant say December 2012. If the threshold was exceeded in May 2011 then this would be around 19 months later when the client is advised of the need to register. It is then not too much of a leap to conclude:-

1. Client misinterpreted/misunderstood registration requirements and registered from Jan-13 onwards, deliberately or otherwise.

2. Client was advised to register from Jan-13 onwards with the hope that HMRC would not look back.

This is obviously purely supposition but would fit the facts so far and my experience with such issues.

 

 

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
05th Mar 2014 11:48

While I know there are two sides to every story, this accountant is known to us and if I was a betting girl, I would bet money on it being his error. I am however open to being proved wrong. 

In any event, a required EDR of June 2009 (based on our analysis), calculated at the latest January 2011 (for 09-10 tax return) and he registers them from April 2011? I smell something rather iffy. Client is as straight up and honest as they come.

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By Roland195
05th Mar 2014 13:01

Can of worms

In all honesty, I see any potential PI claim as largely hopeless as even if negligence is proven (and this will be by no means easy) the interest and penalties incurred will be nothing compared to the actual VAT is seemingly going to bankrupt them.

Unless you will try to argue that the client would have taken steps to reduce turnover below the threshold had they known?

 Another consideration is that you may have your own PI issue on the transfer of the VAT number. I am not criticising or blaming you in any way but the circumstances of the incorporation  may be questioned in light of the liability the company was saddled with.

 

 

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By Malcolm McFarlin
05th Mar 2014 12:47

PI claim

I agree with Roland -pursuing the previous accountant is likely to prove difficult.

You may be surprised but HMRC may do a deal to waive/ reduce the penalties. I have known them to do this in the past for belated registrations. You may also be able to negotiate an extended time to pay period. I have managed to get three years time to pay for a tax investigation. 

Malcolm McFarlin

www.mandrtaxadvisers.com

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Image is of a pin up style woman in a red dress with some of her skirt caught in the filing cabinet. She looks surprised.
By Monsoon
05th Mar 2014 13:30

Thanks

My gut feeling is pursuing the old accountant may just be trouble but I thought it was worth an ask! 

Roland - thanks for the note about my PI - unless I'm missing something, it's better for a Ltd Co to be stuck with the liability than a private individual and in any event, it's still my client who has to deal with it.

Malcolm - thanks for the info re 3 years time to pay, that's really good to know. The HMRC guys were very reasonable and indeed sympathetic so fingers crossed. 

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