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Laptop ate my homework - when VAT records are lost | AccountingWEB | picture of a dog tearing up paper homework.
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Laptop ate my homework: When VAT records are lost

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As businesses move ever faster towards digitalisation and keeping data in ‘the cloud’, Jason Croke discusses the risks of being unable to comply with tax regulations due to a technology fail.

21st Jul 2023
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Aizio Associated Limited was assessed for £21,400 of VAT penalties which was reduced to £10,251 at the conclusion of this tribunal case.  So a partial victory except that the penalties were PLN’s (Personal Liability Notices) which meant the individual Directors are liable, rather than the company itself.

There were two Directors (Billard and Campbell), Billard left the business in 2019. Before leaving, he handed over paper documents relating to tax/VAT to Campbell who scanned the paper documents onto his laptop and then destroyed the documents as he now had digital copies on his work laptop.  During the Tribunal, Campbell accepted that it was foolish to destroy paper documents with no other means of backing up what was only on his laptop.

The February 2020 VAT return was filed on 1 March 2020 (one day after the period ended, the deadline for filing would have been 7 April 2020) and was for a refund of £4,433. Unsurprisingly this triggered a VAT inspection whereupon HMRC wanted to review earlier years, including the years 2018-2019 which were scanned onto the work laptop and with all paper documents having been destroyed.  The VAT inspection was set for 23 March 2020.

Lockdown theft 

The Director had driven to Slovakia early in March 2020 and the work laptop was in his car. Lockdown was announced on 23 March 2020 and the Director returned home by aircraft, leaving his car and all of his belongings in the car, including the laptop. The car and its contents were stolen and never recovered. It is not stated when the Director flew back to the UK but timeline-wise, the VAT inspection was set for 23 March, lockdown was confirmed on 23 March so the Director must have returned sometime before 23 March.

The March 2020 (monthly) return was also filed, was also for a refund and HMRC queried this return too.

Unable to reach an agreement with the taxpayer, HMRC raised a best judgement output tax assessment for periods August 2019, November 2019 and January 2020 and denied input tax reclaims for periods November 2018, May 2019, December 2019, February 2020 and March 2020 totalling £37,155.

The Tribunal

The focus was on the application of the personal liability notices (PLNs) and whether they were valid. The Tribunal stated that Campbell was an unreliable witness who had not presented the Tribunal with his witness statement and contradicted himself during oral statements. Nonetheless, the Tribunal concerned itself mainly with whether HMRC’s best judgement was correct.

The conclusion was that the August 2019, November 2019 and January 2020 returns which were for refunds with no output tax declarations contained inaccuracies. But the Tribunal allowed the taxpayers' returns for the periods November 2018, May 2019, December 2019 and February 2020 were accurate/not subject to penalty.

Learning points

The key takeaways are:

  1. A Director remained personally liable for historical inaccuracies in VAT returns filed during their tenure at the company and for VAT returns they were responsible for filing. That HMRC also pursued a PLN course meant the long-departed Director was personally liable for errors which came to light after they had left the business.

    It seems post departure, the remaining Director set up a new company which traded with the Aizio but no output tax was charged, a common error between associated companies, but one which brought the spotlight upon it from HMRC which then brought the former Director into the arena due to the missing accounting records. 
     

  2. There is absolutely no excuse in this modern world to retain all of your company records on a single laptop which only one person has access to and which, no matter the circumstances, could be stolen, lost or destroyed, taking with it the business records.

A VAT registration requires the business to maintain appropriate accounting records for a minimum number of years and with MTD for VAT now a mandatory requirement, there is no getting away from the fact that accounting records will be digital, whether kept as an Excel spreadsheet or in cloud-based software. Those records must be retained and whether the dog ate your records or not, the lack of records opens the business to accusations of deliberate misstatements which then opens the door for PLNs being served on the directors.
 

Replies (5)

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By Hugo Fair
21st Jul 2023 16:05

Leaving aside the central issue for a moment, I can't work out what was going on here - in that there are references to the following returns:
+ Nov 2018
+ May 2019
+ Aug 2019
+ Nov 2019
+ Dec 2019
+ Jan 2020
+ Feb 2020
+ Mar 2020

Presumably returns weren't for quarterly periods, but if they were monthly then why were 9 returns omitted?

Thanks (1)
Replying to Hugo Fair:
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By Hugo Fair
21st Jul 2023 16:23

Returning to the central issue ... I can't see why digitisation of records should create any fundamentally increased (or decreased) risks - just different ones.

There is a tendency for each new technological method of storing data (in a format guaranteed to remain accessible/readable) to have a shorter & shorter shelf-life.
Conversely it typically becomes quicker & easier with each step change to make backup copies.
Whilst the existentialist threats remain basic if different - flood & fire vs magnetic surges ...

Irrespective of this specific case, the reality is that if and when 'the gods conspire against you' (aka fate intervenes) then we can all find ourselves deficient - hopefully not to the tune of one leg (as per Peter Cook).
https://www.youtube.com/watch?v=lbnkY1tBvMU

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Replying to Hugo Fair:
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By moneymanager
24th Jul 2023 11:47

Re your point on back-ups, I know a life assurance company whose branches dilligently posted tape drive back ups off each night, following a fire the back-ups were retrieved which proved unreadable, the original, and now destroyed, tape drive had an allignment fault; I no longer do back-upscas such, just a complete drive mirroring so even if the PC goes phut you can just put one of the drives in a new machine.

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By hyper10
24th Jul 2023 09:37

and Stan reckoned he'd hooked a 30lb carp but the line snagged

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By Moo
25th Jul 2023 17:56

I have a vague recollection of reading comments on here a while back from a firm taking over a client from another firm of 'accountants' which had been using one of the cloud platforms for client's bookkeeping.
The outgoing firm had apparently deleted the client's accounting records when the client left because they were taking up one of their cloud platform licences.
Working in a practicing firm with many one man company clients I find it quite concerning the extent to which the average client is ignorant about their responsibilities on record keeping.

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