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Verifying a client's income sources

How do you go about broaching the subject if a client's income seems too low to live on?

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How would you approach the conversation if a client with a limited company is providing insufficient records and is declaring particularly low income to HMRC?  For instance, current client I am working on has provided their own workings, substantiated by bank statements, but no sales invoices.  Company has reported losses the past couple of years and the only income recorded for the purposes of his Self Assessment Tax Return is remuneration from the company of £8,424.

I am unsure how to approach the subject of what he is living off - clearly most people cannot live off of £8,424 per year unless they have a particularly well paid partner or benefactor.  Do you go for the 'Due to AML legislation we are required to verify....' approach or the 'if HMRC were to launch an enquiry...' approach or something else?  Or do you just take their word and rely on the fact that they have signed to say that they've told you everything?

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10th Jul 2019 17:10

Be bold. Say something along these lines.

"So what are you living on ? Who's paying for the Merc, the Range Rover and the triplets' school fees at Eton ?"

If he can't answer and decides to go somewhere else, that might be a good thing in the long run.

If he says "I sold my shares in the company for £1.5m and the wife's on £125,000 + bonuses", tjob's a good 'un.

If he says "what's it got to do wi' thee ?", say you were just about to suggest that he wind the company up as he'd get more pushing trolleys at Tesco.

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to lionofludesch
15th Jul 2019 11:26

lionofludesch wrote:

Be bold. Say something along these lines.

"So what are you living on ? Who's paying for the Merc, the Range Rover and the triplets' school fees at Eton ?"

If he can't answer and decides to go somewhere else, that might be a good thing in the long run.

If he says "I sold my shares in the company for £1.5m and the wife's on £125,000 + bonuses", tjob's a good 'un.

If he says "what's it got to do wi' thee ?", say you were just about to suggest that he wind the company up as he'd get more pushing trolleys at Tesco.

I say something similar, but add, these are the questions HMRC etc could be asking.. :D

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By mrme89
to lionofludesch
16th Jul 2019 11:52

lionofludesch wrote:

If he says "I sold my shares in the company for £1.5m

With no interest to report? It would appear that they would also need a financial adviser.

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to mrme89
16th Jul 2019 17:10

£1.5m won't get you more than £1000 interest at today's rates.

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By Dib
to lionofludesch
17th Jul 2019 13:16

Seriously, 0.07%? Perhaps you ought to change banks :o)

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to Dib
17th Jul 2019 13:28

Dib wrote:

Seriously ?

No, of course not.

Don't be so gullible.

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By Jholm
10th Jul 2019 17:19

He may have substantial capital behind him but without asking him you never know. Taxable income is not always an individual's only money pot.

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10th Jul 2019 22:38

I’ve only encountered only a few tax enquiries in my 37 years of private practice. I’m reasonably confident that my client’s respect me and respect my expectation of integrity. If I believe that a client would have difficulty in carrying out his “lifestyle” from the earnings which his accounts portray, I have no hesitation in being blunt in my questioning. One bad apple and, all that.

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By SXGuy
10th Jul 2019 23:12

You need to be straight up and ask. You need to make him aware hmrc would ask the same question. It's in both your interests to understand the situation.

My clients know I can't help them if their not honest with me. And if a client was reluctant to answer a perfectly reasonable question I'd be concerned.

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By Mr_awol
11th Jul 2019 12:43

Depends on the client surely.

Generally 'HMRC might ask what you are living on so I need to document it for my file' is a goon one - or 'You have unused PA and you might be eligible for marriage allowance transfer unless you spouse earns a lot - do they?

Other than that, point out that fact that they've only declared £4,32 of bank interest but have funded nine years of losses and ask whether all they savings they are living on are in ISAs.

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11th Jul 2019 14:45

I do an income/funds received against expenditure with any client I think may prove to be a problem.
If they will not supply the figures/evidence they get a "Dear John" letter.

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11th Jul 2019 17:44

I would agree with the approach above about "asking from HMRC's point of view".

I think its good in general to "know your client" and their circumstances, either how the heck to you advise them?

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12th Jul 2019 10:58

People do make life complicated.
First: with the best will in world the majority of clients are inexact in reporting stuff.
So, year ago I started sending most clients a simple self-complete survey, asking them to list their non-business expenses. I listed all the likely stuff :-Rent, mortgage, insurance, payments to credit card companies, etc. About twenty items
My covering letter is approximately : "This is how HMRC starts its enquiries. You do not have to send this back to me, but please check how you funded this verifiable expenditure, against your business income. Please ensure you have not accidentally missed some income"
Job done, it is down to the client.
It is a long time since the hairdresser told me he was living on £10 per week.

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12th Jul 2019 12:36

If something doesn't appear to be right, you need to ask the question straight. 'What are you living on'?

If the answer that comes back doesn't make sense or they don't want to tell you, you need to consider various things

What is you duty in this instance. Have you uncovered evidence of money-laundering (tax evasion) in which case you need to report this to the NCA

If you just have suspicions and don't know, talk to your professional body first for advice, but definitely get rid of them as a client at some point.

Nothing good can come from this client if they are not being honest with you.

You cannot just abrogate your responsibility by just saying they signed the tax return if you have evidence that it is wrong.

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12th Jul 2019 14:17

In another jurisdiction I worked in part of the annual submission was a personal asset and liabilities list. Banks had to give balances on record at tax year-end as did listed companies. Revenue had access to vehicle records, mortgages (from banks) Property purchases from land registers etc. etc.

Our first job was always to work out his living based on declared income plus variations in net assets. We knew what the average living cost were and could quickly work out if potential under declarations.

Revenue used to catch hundreds each year through this when the taxpayer would not listen to the accountant.

Surprised not introduced here especially with HMRC's all knowing computer surveillance.

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By frankfx
12th Jul 2019 15:29

Good cop bad cop routine may help.

HMRC are bad cop, of course.

As part of your work you do a good cop smell test.

Instantly , you say , figures fail test.

Then produce fancy HMRC type checklist... this lets client know how HMRC quickly identify dodgy tax payers.

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

HMRC produce these kits to demonstrate serious nature of checking the numbers

As good cop you are being helpful and professional .

Also you are demonstrating tax and business risk awareness to assist the client ……….. rather than ignoring the elephant.

Does client have fee protection insurance, if not a few £'oo0s of fees to examine and explain low figures at enquiry stage may concentrate the mind.

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By frankfx
12th Jul 2019 15:29

Good cop bad cop routine may help.

HMRC are bad cop, of course.

As part of your work you do a good cop smell test.

Instantly , you say , figures fail test.

Then produce fancy HMRC type checklist... this lets client know how HMRC quickly identify dodgy tax payers.

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

HMRC produce these kits to demonstrate serious nature of checking the numbers

As good cop you are being helpful and professional .

Also you are demonstrating tax and business risk awareness to assist the client ……….. rather than ignoring the elephant.

Does client have fee protection insurance, if not a few £'oo0s of fees to examine and explain low figures at enquiry stage may concentrate the mind.

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12th Jul 2019 17:22

Just ask the question.

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By DJKL
15th Jul 2019 11:48

You really know you have a problem upon presenting your fee to the client in his premises and he opens the wall safe to peel off about three thousand from bundles of notes but the transaction seems to make little impact upon the wads within- this happened years ago in the 1990s when one of our partners visited a client.

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16th Jul 2019 11:09

Thank you all, that's helpful. I do err towards what most of you suggest but just wondered whether I was being a bit heavy handed. Clearly not!

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17th Jul 2019 13:07

It does seem from the considerable number of replies and or thank-you received, that this is a hot topic.
So here is a little bit of history;
1) In law the accountant is not a detective. This in spite of the fact that sometimes it seems that hordes of persons that should know better, take umbrage at this comment.
2) The cautionary tale:
Some years ago I was hauled before my professional body's disciplinary committee. It was a daunting experience. The outcome was equitable and reasonable. Nevertheless it cost much in time and legal fees.
As a result I do not put any certificate of any sort on any accounts. Nor do I put my name anywhere on the accounts.
This is because even if one uses the verbose, organisation recommended, non-certificates implying we take no responsibility, no-way, no-how,
for the information; Banks and or other financial institutions insist on seeing such non-certificates as the "Accountant's certificate".
Indeed an inspector for my professional body categorically stated that "We want to see our members' names and addresses on the accounts because it enhances the accounts and our organisation".
Well S*d that for a lark. The last thing I want is for my name to "Enhance" any set of unaudited accounts, even for the most righteous of clients.
If the inspector thought this, and the professional body advertises that our name on accounts enhances them, one may understand banks et al thinking similarly.
So, as previously stated, I send my clients a check list. I accompany the accounts with a separate two page, non-client specific, generic letter explaining the basis on which unaudited accounts are prepared.
PS
This does not mean I am daft. I take great care that I and my staff maintain a useful working idea of clients' lifestyles.
I am envious of my colleagues who work by collecting a "Bag of papers" each year, churn out a set of acs, and then go back to bed thinking job done.
Sadly I cannot work that way.

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