Regular readers will know that Incorporation has long been one of my pet subjects. I’ve written two tax digests on the subject and numerous articles. It’s also one of the seminars I am frequently engaged to provide to audiences of accountants.

I was chatting with a business associate (‘Steve’) recently who told me that he had changed his accountants last year – 3 or 4 years after they persuaded him to incorporate. Whenever I hear that someone has changed accountants I always ask ‘why?’

Steve had been with the old firm for ten years. He’d never been especially impressed by them but he stuck with them until they messed up.  In fact at one stage he’d been almost impressed. They persuaded him to incorporate his longstanding partnership business. He wasn’t convinced this was the best thing to do but he remembered the accountants were quite insistent. They said that they would be at risk of a complaint to their professional body if they didn’t incorporate the business due to the tax that could be saved. (This is rubbish of course. Clients can choose whether or not to take advice. It’s their decision. All the accountant has to do is to give the advice AND to ensure that the client only proceeds if they are aware of all the related issues – not just any potential tax saving. But I digress…)

Expecting tax savings Steve was shocked to get a demand for £36,000 ADDITIONAL tax from HMRC some two years after filing the first year’s accounts for the new company.  How did this happen? Steve explained:

His bookkeeper used to work for the accountancy firm who knew they could rely on her work.  After incorporation he had asked the accountants what to do when money came in re invoices issued by the old partnership. They told him to bank it as usual (there had been no change of bank account). The bookkeeper annotated all such receipts in the cashbook as being ‘re partnership’. For reasons I cannot fathom it seems that the accountants ignored the green ink annotation and reflected these receipts as being company income.  The additional tax bill was for the income tax due on the income excluded from the final partnership tax return. (Hopefully the accountants secured a refund for the additional corporation tax paid in error).

This is a shocking story.  It’s no surprise Steve changed his accountants. What steps would you have taken to avoid such a situation arising?