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Accountant not guilty of VAT fraud

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The first tier tribunal dismissed a client’s claims that her accountant acted negligently and without her knowledge. It also upheld the penalty issued for deliberate and concealed errors.

17th Jun 2021
Independent VAT Consultant
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In the case of Shaneika Clarke (TC8133), HMRC raised an assessment for £37,228 in relation to VAT errors for the period ending September 2012.

But the main point to this case is that HMRC also issued a penalty for ‘deliberate and concealed’ errors for £75,962. This was because the taxpayer, who traded as a vehicle hire business, allegedly created “fake invoices” meaning that her input tax claim “was grossly inflated”.

Penalty rate: 204%

The maximum penalty for ‘careless errors’ made on a VAT return is 30% of the potential lost revenue (PLR). For example, if I carelessly claimed input tax of £1,000 on a zero-rated air-fare, this would be a maximum potential penalty of £300.

The penalty rate increases to a maximum of 70% of the PLR for an underpayment that is ‘deliberate but not concealed’ and then 100% for one that is ‘deliberate and concealed.’ The onus is on HMRC to prove that a taxpayer’s behaviour falls into of these categories, the standard of proof is based on the balance of probabilities.

How could a £75,962 penalty be issued in relation to an assessment for £37,228 – a rate of 204%? This exceeds the 100% maximum figure. Here is a possible answer:

Example

John deliberately inflated the input tax claim on his May 2021 VAT return by £75,000, creating false purchase invoices from non-existent suppliers. On the same return, he made arithmetical mistakes that meant he had overpaid output tax by £30,000. HMRC issued an assessment for £45,000 plus a 100% penalty of £75,000 for ‘deliberate and concealed’ input tax entries. This means John pays a penalty of 160% of the VAT assessment of £45,000.

Accusations against accountant

The second horror issue in this case is the serious allegations made by the taxpayer against her accountant:

  • Accused him of registering her for VAT as a sole trader without her knowledge.
  • Said it should have been her limited company: Burton Car Rentals Ltd that should have been VAT registered instead and the accountant had therefore registered the wrong entity. This was strange, because the company was not incorporated until 19 March 2012, so how could it have been registered for VAT in February 2011?
  • Accused him of embarking ‘on a frolic of his own’ and ‘acting negligently’ – in other words, carrying out tasks that extended beyond the instructions given to him.
  • Alleged the accountant had kept HMRC’s investigation into her VAT returns a secret and she knew nothing about it.

The verdict

The judge found no evidence that the accountant had been either negligent or deceptive and there was not a “scintilla of evidence” to suggest this had been the case. The taxpayer had submitted a “grossly inflated claim for repayment of input VAT” which HMRC had rightly corrected and penalised. The appeal was dismissed.

Conclusion

A massive VAT assessment for major input tax errors; a big penalty for deliberate and concealed behaviour; allegations that an accountant had behaved improperly – this case has it all. The final words should be left to the judge:

“In the circumstances where we have already concluded that it was more likely than not that the Appellant provided fabricated invoices to her accountant it seems to us that we are led to the inevitable conclusion that her behaviour was both deliberate and concealed.”

An important learning point from this case is that records of conversations and decisions agreed with clients must always be properly recorded. You never know what comebacks there might be in the future.

Replies (18)

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By Paul Crowley
17th Jun 2021 12:48

Good News
Correct decision.
Think we can all agree with the Judge.
This is one where leave to appeal would in itself be an injustice

Thanks (3)
Chris M
By mr. mischief
17th Jun 2021 16:35

The one time in my 12 years in sole practitioner practice that I got reported to the ICAEW springs to mind here.

I had resigned as the client's accountant in the first quarter of the year. She was very unhappy with my VAT returns. Most of the transactions in her restaurant business account were for horse equipment and other personal items, she thought I should be claiming all the VAT on that.

She complained to the institute about a year later. She'd had a VAT enquiry which had gone badly for her, she complained that I had been negligent in my VAT submissions. Her big problem was that the VAT return which led to the enquiry was submitted over 6 months after I had resigned, and I had taken no part in submitting it.

Her complaint got nowhere fast. Over 95% of the people I have had as clients would never have thought for even a second of making a complaint like that. But if you are keeping robust records then you need have no fears about the other 5%.

Thanks (5)
Replying to mr. mischief:
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By Paul Crowley
17th Jun 2021 21:11

Ever seen The Last King of Scotland?
The doctor advised Idi Amin that his strategy was wrong.
Doctor was correct
Idi Amin blamed the doctor because doctor should have convinced him.

Thanks (3)
Replying to Paul Crowley:
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By Self-Employed and Happy
18th Jun 2021 10:01

Paul Crowley wrote:

Ever seen The Last King of Scotland?
The doctor advised Idi Amin that his strategy was wrong.
Doctor was correct
Idi Amin blamed the doctor because doctor should have convinced him.

One of my favourite films

"But you did not persuade me, Nicholas. You did not persuade me."

Thanks (1)
Replying to Paul Crowley:
By Duggimon
18th Jun 2021 10:09

Idi Amin would make a terrible client.

Thanks (2)
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By johnjenkins
18th Jun 2021 09:55

Hate to say this but "deliberate concealment", "creation of fake invoices", brings prison to mind.
Nah my judgement must be clouded. Hasn't Government learned anything from the rape scenario.

Thanks (2)
Stuart Walker Yellow Tomato Copy
By winton50
18th Jun 2021 09:58

I pity the poor accountant that has had this hanging over them for probably months.

I've never been reported (touch wood) although I did have a client threaten to report me because I refused to do some free work for him after I had resigned. The best thing was that he didn't have the guts to do it himself he got his new accountant to phone me! I told her to put it in writing on her headed notepaper and never heard another thing.

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Stuart Walker Yellow Tomato Copy
By winton50
18th Jun 2021 09:59

Edited as posted twice in error!

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By Mr J Andrews
18th Jun 2021 10:03

Presumably the accountant quickly followed up with his final bill ?

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By bobsto12
18th Jun 2021 10:08

I'm not sure I'd want to rent a car from her.

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By [email protected]
18th Jun 2021 10:24

Not months, but 7-8 years to reach the FTT. This stresses the need to record everything you do on a daily basis and keep a diary, then you will not have to rely on your memory in 7-8 years time as it can well play tricks on you, and you will not have anything to worry about.
Should we still be disposing of clients records after 6 years?

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Replying to [email protected]:
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By JacquiMBurns
18th Jun 2021 14:24

And this why I prefer to email clients (& the partners I work for) rather than a quick phone call, so that I do have a record & one which shows dates & times too!
Or am I just being cynical?

Thanks (1)
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By MartinJG
18th Jun 2021 11:15

At last, some sense 'beyond reasonable doubt' and a warning to all that integrity is, after all, important.

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By TheNovice
18th Jun 2021 14:10

A nice short read from BBC Watchdog regarding this woman:

"We investigated Wyse Cars of Wembley, run by Shaneika Shantelle Nina Clarke. She specialises in renting cars to people under the age of 25. We heard from a customer who had been, unknowingly, hired a car by Wyse Cars that was uninsured, leading to him being stopped by the police, having the car impounded and having to attend court, where the charges were later dropped. A whistle blower, who worked for Wyse Cars, told us he knew of other cases of uninsured cars being rented out, as well as cars in poor condition.

The car we hired from Wyse Cars was found, by our own expert, to be in an illegal and unroadworthy condition.

Shaneika Shantelle Nina Clarke denied running Wyse Cars Ltd, or its other trading entities, which is why, she said, she’s not responsible for the problems. She accepted the car she hired us shouldn’t have been rented out but blamed a negligent member of staff for letting this happen and said it didn’t happen routinely. She said she stopped renting out the uninsured BMW and written-off Vauxhall Astra, that we found in the car park in our film, before our investigation began.

She added that she was a young, black, businesswoman and asked us to leave her alone, then offered to come and meet us in the studio if we had any additional questions, which we didn’t."

Thanks (4)
Replying to TheNovice:
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By johnjenkins
18th Jun 2021 14:31

She said she was a young, black, business woman who asked us to leave her alone. Now we know why she hasn't been banged up.

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Replying to johnjenkins:
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By qhas
03rd Aug 2021 16:11

Careful when you jump to conclusions. You could look silly sometimes particularly when bigotry plays a substantial part

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Replying to qhas:
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By johnjenkins
04th Aug 2021 09:28

Her words not mine, so where's the bigotry? Observations aren't jumping to conclusions.

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By qkerluke
24th Jun 2021 10:46

Tax fraud will be reduced if tax administration is highly effective. There is much work to be done to reduce cookie clicker tax fraud, in which, identifying tax frauds is a regular need.

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