Hi All,
I am after a bit of understanding with a situation my client is in. I am completely baffled.
Basically, I picked up a new self-employed client a few weeks ago, let’s call him Mr C. Client does some work for someone else, let’s call them Mr S. Once work has been completed, Mr S pays Mr C for the work he has done but he pays out double and then requests that Mr C pays half back. So if he works £500, Mr S will pay out £1,000 and then Mr C pays £500 back to Mr S (Either that day or 1-2 days later).
My client says that this happens every time he does work for him. He has spoken with others who also do work for Mr S and they say the exact same thing happens with them.
I asked my client if he gave an explanation for this and he said that it was explained but he didn’t understand the jargon but said accountant of Mr S said it was to do with a loop hole. My client didn’t seem to be bothered as long as he wasn’t being underpaid.
I have asked a few other accountants and they did not understand the reason behind this way of being paid. All thought the same that potentially fraud is being committed somewhere.
Has anyone come across this before?
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That was my guess also. I asked my client if he knew the bank details that it was coming from and if it was the same as the ones that he paid into and he didn't.
I wouldn't discount Mr C having actually invoiced for £1k then changed it to £500 once he's received the money.
But you confirm it's a company below. So company may well be being defrauded (as well as the taxpayer).
That it is for work performed for that particular job he was working on for Mr S. It has the right amount invoiced from my client, just that he gets paid double and has to reimburse half back.
BUT
your client MUST surely know something is wrong
On enquiry into Mr S it would appear that your client is cooperating in the suspected fraud
Does Mr S get work done for others?
If you do the accounts, you are also seeing an undefendable position of regular double payment
Money comes in, half paid back and the remaining matches to the invoices for work done for Mr S. Only work done for Mr S is paid double. Work done for others is invoiced and paid in the "normal" way that it should.
That it is for work performed for that particular job he was working on for Mr S. It has the right amount invoiced from my client, just that he gets paid double and has to reimburse half back.
Agree with PC then that the client is complicit with whatever is going on which is, at best very suspicious.
it sounds like a very basic repayment fraud.
if this happens "all the time" I am surprised the person being defrauded has not noticed.
Thing is, my client still gets paid for what he has invoiced. His only concern was being under paid which isn't happening.
Just trying to work out if I have a reporting issue. Thing is I don't know the person who he does work for nor do I know who his accountants are. I don't have evidence besides what my client has told me.
If your your client is invoicing you must have the details of who he is invoicing. Get your client to ask again what this "loop hole" is. Unknowingly your client could be helping with what looks like money laundering. Is your client under CIS if so what is being deducted? He will have the bank details of who he is paying the money back to - can you see were its coming from? Do you need to think about submitting a SAR for your client?
I have name of company but I have no idea who they are, but will look in to it further to see if I can dig out more details and even who . No CIS being deducted. I will look at SAR for my client. I had a feeling this might be the case.
Get your client to ask again what this "loop hole" is. Unknowingly your client could be helping with what looks like money laundering.
I have asked him to get it in writing why this is being done.
if this happens "all the time" I am surprised the person being defrauded has not noticed.
I suspect that the "person" being defrauded is the taxpayer population.
Don't forget that reporting of suspicions is not limited to reporting suspicions of your client.
This does look as if Mr S is engaged in a fraud of some kind, and this is reportable.
David
I think that's a stretch. Looking at s44(4) & (5) Criminal Finances Act 2017 a person is "associated with a relevant body" where they are an employee or agent of the relevant body or "perform services for or on behalf of" the relevant body.
Reading that in context I take it to mean not just an ordinary supplier but someone who acts in a way which is akin to being an employee or agent of the relevant body. So I don't see Mr C as being, in this sense, associated with Mr S's employer.
If he were of course the offence would be committed by Mr S's employer, not Mr C or Mr S.
Whether Mr S's employer is committing an offence by failing to prevent Mr S from committing a tax evasion offence is an altogether different question!
David
Thank you.
So does the client not actually have any legal responsibility? Obviously his own tax position might be exposed as I mention below, so self-interest might mean that he has to do something… but maybe that's a good thing: the accountant will want to advise the client to 'withdraw' from the arrangement, and do so without tipping off; being able to say that the arrangement is disadvantageous to the client might enable this?
TD, I hope you don't mind that I answered the question you asked - not the one you ought to have asked!
Have a read of s328 PoCA 2002 concerning 'entering into an arrangement'.
It would be sensible, if the client 'knows or suspects' that some fraud is being committed, for the client (or a solicitor on his behalf) to make what is known as a DAML (defence against money laundering) report to the NCA.
If the OP wants to tell the client to obtain legal advice that's fine. (That would not be tipping-off, see s333D(2).)
But the OP's responsibility is to file a SAR regarding Mr S.
Cheers
David
I'd love to be a fly on the wall in an Hmrc enquiry when they ask your client, "why can we see you get paid double and then repay half every single time"
Clearly client won't have any answer that will be believable and will no doubt end up getting caught up in whatever can of worms get opened.
Let alone: "why can we see you get paid double and then pay half to a different person every single time?"
The can of worms for the client could include tax issues such as:
- The full amount paid by the customer being taxable (as a voluntary payment)
- No deduction for the payment to Mr S (it's not buying anything)
- VAT
"My client didn’t seem to be bothered as long as he wasn’t being underpaid."
"It has the right amount invoiced from my client, just that he gets paid double and has to reimburse half back."
I could add to all the fascinating hypotheses, but there's only one question for OP:
* Why does client put up with this?
Aside of the almost certain illegality going on somewhere (into the orbit of which he's being pulled), it's potentially costing him money (bank charges, accountancy fees, etc) - without any discernible benefit in return. Really?
[If a client paid me twice the invoiced amount, I'd issue a C/N and tell them to use it on their next order!]
[If a client paid me twice the invoiced amount, I'd issue a C/N and tell them to use it on their next order!]
Why would you issue a credit note for an over-payment? If you invoiced £500 but your client paid you £1,000 and you then issued a credit note for the £500 overpayment, then you'd now have been overpaid £1,000!
Apologies, written in haste and missed out a step. What I meant to say was ...
[If a client paid me twice the invoiced amount I'd issue an invoice for the extra amount, along with a C/N and tell them to use it on their next order!]
BTW, the square-brackets were meant to indicate that it was tongue-in-cheek.
Anyway, strange that no-one else noticed! :=)
If it is being repaid via bank transfer then presumably client can confirm bank details (i.e. business name etc) this can be checked to a sales invoice from other company to confirm same or different bank account.
Is your client VAT registered as if not the double payment may well take them over VAT threshold, which provides a great reason to clarify position, also if VAT registered does he have a VAT credit note for the refund. As if always paying double going to be very hard to convince HMRC that original invoice should not have been for full amount and therefore your client has no evidence to reclaim VAT on refund.
Would it put him over a VAT threshold? From the clients perspective the error is on the customers side.
He invoiced for £500, the person pays him £1000. I wouldn't raise a credit note for the £500 refund - as there was never an invoice for the £500 extra in the first place?
There isn't a refund.
The customer (the company) pays £1,000; the supplier (OP's client) pays £500 to ANOther.
(In fact, a big clue to the fraudulent nature of the transaction is that the customer never asks for a refund. It does make me wonder whether there is a potential liability to the customer here, on top of the tax and VAT issues I mentioned above.)
David's suggestion of taking legal advice sounds wise to me.
Mr S claims twice the real amount as a cost in his accounts & pockets the half repaid to him.
Yes, but that's not how the transactions are recorded in his books. He does it all on a cash basis. Double the expenses in the company. 50% tax free in his own pocket.
Bizarrely if this was promoted as a tax evasion scheme (which it is) rather than a tax avoidance scheme then unlike tax avoidance there are no £1m promoter penalties and only potential POCA 2002 fines (which could be next to nothing) per my comments here:
https://www.accountingweb.co.uk/tax/personal-tax/stop-notice-penalties-c...
As I said, bizarre (or at least it's very odd that you can potentially avoid a £1m penalty by arguing that you were promoting tax evasion rather than tax avoidance!).
Yeah although this 'plan' was attributed to an accountant, it was Mr S that said that and it's almost certainly pigwash.
And I doubt pleading guilty to a criminal offence looks good on an accountant's CV. Plus... would they really want to risk a lifetime ban from participating on Aweb?!
And I doubt pleading guilty to a criminal offence looks good on an accountant's CV. Plus... would they really want to risk a lifetime ban from participating on Aweb?!
I can honestly say I am not ready for a life time ban (who is?!) I need to protect myself first. So I am going to make the necessary reports. No client is worth the hassle this can cause.
I think a month or two in jail for something like this is far preferable to a £1m fine for most people. Indeed, there was a recent VAT case I think where the taxpayer was complaining he was not being criminally prosecuted because the penalties were less severe than for a non-criminal tax case.
The 'problem' with being criminally prosecuted (and convicted) is that confiscation may follow - and that would require the evaded tax to be paid.
The 'good news' with a criminal conviction is that, in money terms, the total penalties & confiscation may be less than the tax plus a civil penalty. The reason is that there cannot be a civil penalty after a conviction as the 'penalty' aspect has already been determined by the court. That penalty may take the form of a suspended prison sentence - so not a financial penalty.
Of course a person convicted of tax crime cannot then be self-employed as an accountant in practice.
David
Thanks for confirming there are not "numerous other" (financial) penalties for being a promotor of tax evasion schemes as the other commentator had wrongly claimed in the above link.
It's not a "loop hole". Its a scam.
Almost certainly the refund is not going to the business that pays him but is going to Mr S himself.
The business will be accounting for the spend - ignoring the invoice value and using amount paid - so have an artificially reduced profit and Mr S has "tax free income".
SAR report time.
Yup, I agree that it is a scam. When the word loop hole was used, it threw me and made me almost doubt myself hence I was trying to clarification to see if anybody else had heard of this happening before.
I think a SAR report is in order.
I think a SAR report is in order.
If in your SAR you can identify the bank account receiving the repayments that would make the report much more useful!
David
Nothing to add above what has already been said. Just to say that I can't wait to hear what the scam/fraud is, once the OP has found out. #intrigued