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?
Sorry, Mark, I didn’t follow that explanation of the extra tax at all. Presumably, the invoices were included in p/s sales and in debtors, and so what income was excluded?
I have to assume that the income wasn’t reflected in the partnership accounts at all. Must admit I could just about accept it would be possible to double count the income in p’ship accounts and then in the company accounts too. Like you Paul I struggle to see how anyone could exclude the receipts and the invoices from the p’ship accounts but it seems the accountants did just that.
I suspect that little guidance or advice were provided to the client re necessary changes to the business paperwork on incorporation. Some accountants do just focus on the headline tax issues, incorporate a company and take loads of short cuts. This leaves the client high and dry when the taxman takes a look and everything has to be unravelled.
Sorry, I don’t follow this also. If Sales invoices are issued by partnership. Then the resulting debtors would be carried into the partnership and the money received credited against it. So where is this double counting as there is no duplicated sales invoice raised by the limited company.
The explanation baffles me.
Sorry the resulting debtors would be carried into the limited company who would receive this money and credit it against the debtors.
No follow through ……. this is not really a surprise is it, advice given on what to do but no assistance given after the event to ensure everything goes to the correct little pigeon hole.
Often I think this is because clients try to drive down the accountants fees so in return the accountant has less time to spend ‘hand holding’, big mistake for all.
Accountants should not get involved in driving fees down, there are many ‘bucket shop’ type operations out there that do it for £Cheap and they have their place and there are clients that only need that.
Our fees many not be the cheapest (or most expensive) but we ‘hand hold’ and we have to recover this time some how, but I think its a win win.
Jason
Could the extra tax have resulted from the final accounting period of the partnership being for longer than a year with some vdirector’s remuneration also being paid in the same tax year?
Or was the additional tax higher rate income tax on a dividend from the company
Or might it have been CGT on transfer of goodwill.
Not a good idea to relate a story that may be hearsay and several misunderstandings
Thanks for your comments.
Whilst we all know that clients can sometimes be unaware or choose to ignore key facts their perception is all that counts for them.
I have shared the story and Steve’s first hand recollection of the events. Clearly something isn’t right – whether that’s Steve’s recollection or something the accountant did wrong we can’t know.
When I lecture on the subject I always stress the importance of running the numbers and ensuring the client understands the subsequent tax cash flows – both as regards tax on profits from the final period pre-incorporation and also the tax due on salary, profits and dividends. Plenty of accountants give the generic advice re theoretical savings but omit to provide cashflow projections. Surprise tax bills = unhappy clients as the story above shows.
It sounds perhaps that the bookkeeping system was based only on cash accounting ?
Great info. Lucky me I found your website by chance (stumbleupon).
I have book-marked it for later!