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What accountants can learn from Hillgrove case

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10th Jun 2014
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The trial this spring of celebrity PR Richard Hillgrove at Bristol Crown Court on two counts of tax fraud was almost as uncomfortable for his former advisers, who faced hostile questioning as part of his defence. Following his conviction, Rachael Power summarises key points that every accountant should bear in mind when faced with difficult clients.

The wheels of justice started turning in 2011 and 2012 when Richard Hillgrove failed to pay HMRC £52,268 of VAT charged to customers of his PR company, and deducted £44,846 in PAYE from employee wages without passing it on to HMRC.

Hillgrove received a sentence of 15 months' imprisonment, suspended for 24 months, and was required to carry out 200 hours of unpaid work. He was also assessed for £5,000 in costs.

The PR guru defended himself and adopted a scattergun approach that attempted to shift the blame for his tax screw-ups on to his accountants. To try and save other accountants from similar ordeals, this article highlights five potential lessons for practitioners

Lesson 1: Always get written confirmation 

In Hillgrove’s view his accountants Bishop Jones were the prime culprits - accusing them in court of conspiring with HMRC to “set him up”. Central to his argument was the allegation that Bishop Jones had formed a limited company in his name without his consent. 

The limited company was set up following a Time to Pay agreement with HMRC concerning outstanding tax in Hillgrove’s existing firm, which was a limited liability partnership.

While Bishop Jones alluded to the limited company in email correspondence following its incorporation, it did not get written consent for the decision. Such evidence would have made Hillgrove's argument in court unsustainable. Even when acting for a trusted client, verbal consent alone should not be adequate for such a significant development. If something happens down the line and you have to prove to HMRC or even a courtroom, it will make life much easier if you have written instruction. 

The requirements surrounding retaining client documents and written information were covered recently in Keeping client records: what you need to know.

Lesson 2: Do your homework

Many practitioners come to Any Answers for advice on whether or not to act for specific clients, as in this thread from 2010.

Asking your peers can always be a useful source of advice, but if you have a doubt about a client’s ethical practices, financial background or even a little unexplained niggle of suspicion, the onus on you is to do your own due diligence.

In Hillgrove's case, it was clear that he was faced with mounting tax debts. In every instance when he switched accountants, the new adviser noted that his record-keeping was was poor, and work was needed to bring the accounts up to scratch. Yet several advisers proved quite willing to take him on, despite his inability to work effectively with professional accountants. His apparent lack of control over his business expenses, and inability to separate them from personal expenditure, should also have set alarm bells ringing.

In addition, it emerged in court that Hillgrove had been a director of a company dissolved in 2008. He argued in his defence that this was why he was reluctant to follow his accountant’s (alleged) advice to “phoenix” his LLP and reconstitute it as a limited company to remedy the tax debt situation he faced.

Hillgrove said in court that Bishop Jones partner Michelle Bishop had told him she knew people with dissolved companies who were still directors and that his fears of being struck off were therefore unfounded. But from the perspective of an HMRC investigator, adopting a phoenix strategy would look suspicious. This was something Bishop Jones later confirmed when it filed a suspicious activity report (SAR) on the day after he left the firm’s care (see below).

Would the firm have been exposed to the ordeal of Hillgrove’s trial, if it had researched Hillgrove more thoroughly before taking him on as a client?

Tools to help “do your homework” on clients include free search facilities on sites such as DueDil, which will tell you who's been a director of what company and subsequent company details (some paid for), and Companies House. 

If lots of warning bells are ringing (muddled accounts, slow to pay tax, previous company dissolutions and lax expense policies) then either proceed with much caution or politely decline. 

Lesson 3: Do not neglect anti-money laundering responsibilities

If it gets to the point in a client relationship when you need to report your suspicions, either to your Money Laundering Reporting Officer or to the authorities if you hold that role, remember not to dither and to be meticulous in recording the nature of those suspicions.

It’s extremely rare for the existence or contents of suspicious activity reports to be revealed in court, but during Hillgrove’s trial it emerged that the SAR filed by Bishop Jones and its discovery by HMRC had triggered his criminal prosecution.

This disclosure in court came as a shock to many practitioners, who have been schooled about the severe risks of “tipping off” anyone that they were the subject of such reports. But the confidentiality rules surrounding the process do not provide any guarantee that this won’t happen again.

If the worst was to come to pass, any SAR should clearly state the nature of the suspected misconduct and the evidence on which that suspicion is based. At Bristol Crown Court, for example, Hillgrove alleged the mention of “Downing Street involvement” in his SAR was part of the conspiracy against him.

If evidence comes to light that someone in the firm has realistic suspicions about a client, the MLRO should not hang about before filing a report.

Like many lay people, Hillgrove had only a vague understanding of the money laundering regulations. This might have been alleviated by reference to the firm’s responsibilities under the anti-money laundering regulations in its engagement letter - as long as the client actually read the document.

Lesson 4: Don't make assumptions

The prosecution litany of Hillgrove’s outlandish expenses was one of the central features of the case against him - ranging from rented a Mercedes, 5-star hotel stays and sex toys that Hillgrove insisted were props for a client’s racy book launch.

But the spending that was subjected to cross-examination in court exposed one of the profession’s most common weaknesses - the “guestimate”. Somewhat ironically, Hillgrove argued in his own defence that “there was no accounting discipline” at Bishop Jones, adding that Louise Dale made decisions on expenses “based on a hunch”.

In November 2011 Bishop Jones provided HMRC with draft accounts and VAT returns showing a lot of expenses that had not yet been analysed or processed. Modern accounting software (and even smartphone apps) should eliminate any excuse not to annotate or document business expenses adequately.  

Lesson 5: Manage clients proactively

If uncertainties do persist on issues such as expenses, directors’ drawings or loan accounts, nip them in the bud - and start to review whether it’s worth your while for the firm to continue dealing with such high-maintenance and high-risk clients.

In particular, whatever the legal ramifications of the situation a continuing lack of co-operation from a client should prompt decisive action on the firm’s part. Ultimately, such clients are not going to be easy, or profitable, to work with. And if you don’t take firm control of the situation when trouble first starts brewing, you may face the risks which were played out in such a dramatic fashion at Bristol Crown Court this spring.

What other lessons would you draw from the case? Please note that while he has been convicted and sentenced, Richard Hillgrove has sought leave to appeal against his conviction and if this is allowed, elements of his case will still be sub judice. It is permissible to cite contemporaneous coverage of the trial, but please stick to the conclusions you can draw from the case as a professional rather than discussing his or the accountants’ conduct.

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Time for change
By Time for change
11th Jun 2014 09:27

Cases like this, in my opinion,

demonstrate how extremely poor the Money Laundering Regulations (MLR) are.

Like many lay people, Hillgrove had only a vague understanding of the money laundering regulations. This might have been alleviated by reference to the firm’s responsibilities under the anti-money laundering regulations in its engagement letter - as long as the client actually read the document.

I doubt whether this person, or indeed many others, has the faintest idea, never mind understanding of what the MLR actually are.

Our profession, akin to many others, in the financial and legal field, were built on a bedrock of; trust and confidentiality. It wasn't that we could "take our pick" with whom we could discuss client's affairs, it was a simple fact, there was no room for deviation. Forty years on, I now work in an environment where this "standard" has, effectively, been; on the one hand, discarded and, on the other, offers me, as an individual, no protection from the report made -

It’s extremely rare for the existence or contents of suspicious activity reports to be revealed in court, but during Hillgrove’s trial it emerged that the SAR filed by Bishop Jones and its discovery by HMRC had triggered his criminal prosecution.

This disclosure in court came as a shock to many practitioners, who have been schooled about the severe risks of “tipping off” anyone that they were the subject of such reports. But the confidentiality rules surrounding the process do not provide any guarantee that this won’t happen again.

Whilst not in any way condoning any form of criminal activity successive Governments have merely downsized many of their agencies and effectively transferred and privatised some of their detection capabilities, to the professional sector. Adequate training wasn't even a consideration.

Elements of this case suggest, a damned if you do and damned if you don't mentality, which in my view, is grossly unfair and untenable, in the long term.

 

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By Ian McTernan CTA
11th Jun 2014 09:58

Hang Yourself

It’s extremely rare for the existence or contents of suspicious activity reports to be revealed in court, but during Hillgrove’s trial it emerged that the SAR filed by Bishop Jones and its discovery by HMRC had triggered his criminal prosecution.

 

So, you submit what you think is a completely confidential report about the crazed drug running gang and it is later revealed in Court that you filed a report.  The gang gets off on a technicality.  Are you going to be assigned protection for the rest of your much shorter expected life span?

These reports were supposed to be utterly confidential, but now it appears you put yourself in the firing line by making the report.  So damned if you do, damned if you don't.

I'm glad that I have never found myself in such a position, but it does make me wonder what planet the people who think of these things live on.

 

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