VAT: Accountant blamed for registration shambles

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Neil Warren examines a late registration case where the tribunal accused an accountant of professional negligence.

In all of my years of reading VAT tribunal cases, I can’t recall seeing such criticism of an accountant by a judge as I read in Peter Hartigan T/A Striking Iron (TC07109).

Hartigan traded as a sole proprietor, mainly dealing with repairing and fitting gates and had used the accounting services of Alan Henderson since he began in self-employment in 2005-06.

The tribunal concluded that Hartigan had been “seriously let down” by Henderson, who had shown a form of “professional negligence” by not following up on his client’s VAT registration despite the fact that Hartigan’s SA returns showed income that breached the threshold for over two years.

However, the situation was not helped by a disappointing performance by HMRC. The officer couldn’t even work out £26,783 x 20% in relation to a late registration penalty, coming up with a figure of £5,525 rather than £5,356.60. The judge said that the officer’s evidence “could be clearer and more precise as to matter of fact.”

Late registration

I sympathise with Hartigan: he employed an accountant to do his self assessment tax returns, which declared turnover exceeding the VAT threshold from 2012/13 onwards, but the VAT registration problem did not come to light until two HMRC officers visited his home in November 2015. A backdated VAT registration was made to 1 December 2012.

Hartigan claimed he had never been advised to register for VAT by his accountant, and he believed that the VAT only had to be taken into account when profit (not turnover) exceeded a certain threshold. He had never charged VAT on his sales. The tribunal concluded that Hartigan had been let down by Henderson, and had “chosen the wrong accountant”.

Flat rate scheme

The fun and games continued when the taxpayer was encouraged by Tom Murray, a new accountant he had engaged, to join the flat rate scheme with retrospective effect from December 2012, and apply a 9.5% rate to his gross income that was relevant to his business.

HMRC calculated that tax of £21,335 was due for the period from 1 December 2012 to 31 March 2015 and £9,150 for the year to 31 March 2016 and assessed these amounts.

Murray submitted a VAT return for the year ended 31 March 2016 only, showing VAT due of £5,449 rather than £9,150, which seemed to be based on non-FRS accounting.

The problem

The judge felt that the trading arrangements of the business meant that it would have paid up to 40% less tax by staying out of the FRS, so £21,335 was a very high VAT bill for the period to March 2015. But HMRC does not allow a retrospective FRS withdrawal just because more tax has been paid.

However, the judge encouraged HMRC to allow Hartigan to withdraw from the FRS back to 2012 in view of the exceptional circumstances, and recalculate his liability.

Learning points

I recommend you read this case and consider the highly critical comments made by the judge about Alan Henderson, Hartigan’s first accountant. It is possible that Henderson was a very busy man and that Hartigan was a small client who fell under the radar. However, we need to ensure that our small clients are given the same level of service as our bigger clients.

Also, before we encourage a client to join the FRS, we should be very clear whether it will work against them in terms of paying more VAT. Be aware of the draconian 16.5% rate for a limited cost business that has been in place since 1 April 2017.

Final comment

I felt genuine sympathy for Mr Hartigan. His main skill is the ability to repair gates rather than dealing with academic subjects such as tax.

Overall, it was all a bit of a fiasco. If Lord Sugar had been judging this case I think his final words for both the accountant and the HMRC officer would be: “you’re fired.”

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

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31st May 2019 15:49

Fitting gates must be lucrative for a sole trader to reach (or want to reach) the VAT threshold!

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By Dib
to memyself-eye
31st May 2019 16:40

His turnover included relatively high value materials such as the gates themselves

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to memyself-eye
02nd Jun 2019 22:22

memyself-eye wrote:

Fitting gates must be lucrative for a sole trader to reach (or want to reach) the VAT threshold!

Believe me - it is.

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By Mr_awol
to memyself-eye
03rd Jun 2019 10:24

memyself-eye wrote:

Fitting gates must be lucrative for a sole trader to reach (or want to reach) the VAT threshold!

They're a little more expensive than I'd realised to be honest. I assumed it would be about £5k or so - and you probably can get a small/lightweight one for that, or a paid of automated swinging gates which seem to be much cheaper than sliding gates. Round here, (based on quotes obtained about six months ago) a rolling metal driveway gate of reasonable sturdiness to plug a 12 foot gap, with remote controls from the house, car key fobs, and a phone number for dial-in/text access for visitors will cost anywhere between £8k and £15k, supplied and fitted. £12k gets you a very nice one (or I think so anyway) and if someone was selling a few of those a year, plus doing off bits of repairs and maintenance work, they could easily turn over far more than the VAT threshold

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31st May 2019 16:32

Looks like an open and shut case to me!!

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to alan.rolfe
31st May 2019 16:34

Bravo! Let's hope he ring-fenced some funds to pay the bill.

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03rd Jun 2019 10:43

When i read this i immediately thought, sounds like the infamous Dr Heidi Poon and surprise surprise it was. Heidi Poon is to the Tax Tribunal what Roland Freisler was to the Justice system of Germany. The love of berating accountants before her is not a one off.

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By ioncube
to bjcairney
03rd Jun 2019 12:33

But you're not defending the accountant surely?

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By ChrisKH
03rd Jun 2019 11:17

Intrigued by such negligence, I read further and the accountant said 'he was not surprised about the intervention check and that he had warned Mr Hartigan ‘several times’ about VAT.'

So, not as clear cut then. I would have followed that up with a letter recommending registration. The accountant should have been clear and covered his backside, but was he negligent? He advised the client verbally and the client (possibly) chose to ignore him. And the judge chose to side with the taxpayer's version that he had never been told.

We've all had clients like this and the client was lucky that HMRC/judge decided to accept his version (on the advice given about registration). Hence the need to be extra careful.

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04th Jun 2019 08:51

We have had similar cases of a shocking "Accountant" who basically made the figures up.

For example, in one case Turnover declared each year was under the VAT limit, and taxable profit under the personal allowance.

HMRC undertook a Compliance Check and refused to deal with the "Accountant" as he ignored correspondence, so the guy came to see us to get him out of the mess he was in.

The actual turnover was double the VAT limit for over 15 years, with a liability for the last 6 years alone of approx. £150K.

We negotiated a settlement of less than £15K payable over 3 years.

What really peeved me was that he then changed accountants, to another cheapo outfit. But at least we got paid!

This "Accountant" is still trading and HMRC seem to have done nothing at all about it despite the appalling work he submitted to them, and no doubt continues to do so.

Don't worry though folks, with MTD, John the Plumber can just press a button on his iPhone and his tax will be spot on.

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By JackH
05th Jun 2019 17:54

I am often overwreaked when I come across wreaked iron gates as I am when I hear anyone has suffered a defeat "to" someone else. We are not told of the nature of the gates though they seem to have wreaked havoc and the taxpayer to have suffered a defeat "to" HMRC

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By JackH
06th Jun 2019 11:19

I wonder what the gates were made of?

I am often overwreaked to find that havoc has been wreaked and nip out to kick our wreaked iron gates.

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By JackH
06th Jun 2019 11:25

What were the gates made of?

I am often overwreaked to find that havoc has been wreaked and nip out to kick our wreaked iron gates

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