Large VAT Error Discovery

[abc1980]

Hello everyone,

I'd really appreciate your advice on events happening with my limited company.

We have owned a successful food business for the past decade. We do all of our own bookkeeping (and have done except for the first year), but recently discovered an error in our processes that originated from the formation of the company, as this is how our bookkeeper of the time instructed us.

We believed that no VAT was paid on food and drink that was take-away. A fundamental mistake, but completely unintentional. We have let the HMRC know straight away that we're calculating how much we owe them. Initial work suggests over £100,000 is owed (over the past four years only).

This figure, ignoring the potential penalty and interest, will be a huge burden on the company, even potentially putting it out of business. This is because, now discovering the true nature of the VAT, the business needs to change in order to become profitable. We believe that by reducing staff hours we can cope with the extra VAT cost, but we do not have enough money to pay off the debt.

So, I have a few questions for you, the community.

1) In your experience, how do you feel the HMRC will respond to an error like this? We're making the disclosure, and we feel like we took reasonable care to avoid mistakes. Is this a likely judgement? If not, is it likely it would be seen as careless, or even deliberate? My heart skips a beat even thinking about it. What about penalties, and perhaps even having them suspended?

2) Have your experiences with the HMRC Business Payment Scheme ever dealt with amounts of money so large? We'd need to pay it back over a long period, of maybe a few years!

3) If the HMRC are uncooperative, we might be forced to get a business loan. This worries me, as all I've heard in the news is that banks are lending less, and such a large amount will really weigh down the business.

So, overall, I'd just like to hear what you think. I've seen you give great advice across the forums, so I'd love to hear what what advice you have for my situation.

Thanks a million.

 

[Spongebob]

I suspect that I would have set up a new company, slid the business across from OldCo to NewCo, and then applied to Companies House for a strike-off of OldCo. Chances are that you would have got away without paying a penny of the debt as no-one would ever have known about it.

Unfortunately though, you have already informed HMRC of the mistake, so this escape route is closed off. You are too honest!

However, it may still be possible to transfer the profitable parts of your business to a new company, letting the old company go bust with the HMRC debt.

 

[Bob]

Do you have an accountant? Did they not pick up an error of this size?

Takeaway food and drink liability can be a nightmare as it can depend not only upon the nature of the food and drink but also the venue.

With a liability of that magnitude, have you considered employing the services of a VAT specialist to ensure that you are now calculating it correctly?

ps Spongebob is the expert on avoiding liabilities such as this !!!

 

[Jenni384]

will be a huge burden on the company, even potentially putting it out of business. This is because, now discovering the true nature of the VAT, the business needs to change in order to become profitable. We believe that by reducing staff hours we can cope with the extra VAT cost, but we do not have enough money to pay off the debt.

[...]

3) If the HMRC are uncooperative, we might be forced to get a business loan. This worries me, as all I've heard in the news is that banks are lending less, and such a large amount will really weigh down the business.

All legitimate reasons for seriously considering Spongebob's suggestion, and I think this is worth looking into asap.

Regarding HMRC's position (though my gut feeling is focus your energies on moving the business in a legitimate way into a second limited company), if you paid a qualified and experienced bookkeeper then I would like to think you'd taken reasonable care in getting your VAT right (even though they got it wrong).

However, as a Ltd Co I would expect you had an accountant to prepare the year end, and I would have expected them to pick up on this.

Though it makes sense for HMRC to let you pay it back over time, they are acting rather more aggressively at the moment, meaning that they might be illogical and demand more money more quickly. This might bring us back to point one, being closing this company and letting most of the tax debt dying with it and opening a new one.

If this tax debt makes the company insolvent, you should stop trading anyway, so you need to find out if this is the case.

Did you speak to your accountant before contacting HMRC? You need to talk to your accountant ASAP if you haven't already.

Above all, don't panic - you have limited liability, and there is a way through/ out of this, you just need to have the right advisors on board.


Edit: What you don't want to do is get a bank loan as it will likely require personal guarantees, and that takes all your limited liability away.

 

[Philip Hoyle]

Do you know, for certain, that you owe that much money? Who told you? Have you checked the rules carefully?

There's a very subtle difference between selling food (zero) and catering (standard). It's nowhere near as simple as some people think - i.e. the standard mistake of thinking cold=zero and hot=standard.

If, for example, you cook say meat & potatoe pies - if you sell them at ambient temperature once they're out of the oven and they're not eaten on the premises and not sold as part of a meal (i.e. served in a box with mushy peas or gravy), then the sales are in fact zero rated. The key is not doing anything more with them once out of the oven, i.e. no reheated, no keeping warm in a hot cabinet etc. And, of course, it has to be something that is "eatable" hot or cold - it works with pies but wouldn't work with, say, fish & chips that no-one would really buy if they were just warm or cool and certainly wouldn't eat them cold!

That's why chains of sandwich/pie shops just have their "hot" food sat in a counter which is neither heated nor chilled - it's just sat there at ambient temperature and therefore zero rated if wrapped in a paper bag to eat off the premises.

Similar story with sandwiches. If you sell a sandwich in a bag to eat off the premises, it's zero rated, but if you put several assorted sandwiches on a platter with a salad garnish, it's "catering" and therefore standard rated.

There's so much mis-information about food and catering, so I really would make sure that you're now doing the right thing, and not just made some assumptions. I'd really suggest you consult a VAT specialist to make sure you're now on the right track.

 

[abc1980]

Thanks for your thoughts!

Our accountant was not responsible for the accounts, just to sign off on them and make sure all aspects of the end-of-year were in order. He was never responsible for my VAT.

I'm surprised you suggest that I simply shut down the company and restart another one - surely the HMRC will get their money by any means they can??

We did seek advice from our accountant and also a VAT specialist friend from one of the big four. They both suggested that we make the declaration ASAP, just in case we get a letter on our door on Monday announcing an investigation! It seems like the HMRC are much more lenient if you announce the errors yourself.

Thanks for your advice regarding the VAT specialist. The HMRC do give very clear explanations of what is VATable, so we've gone through it carefully to make sure we now have it right.

Thanks for all your help, and please keep it coming!

 

[Bob]

Our accountant was not responsible for the accounts, just to sign off on them and make sure all aspects of the end-of-year were in order. He was never responsible for my VAT.

I'm surprised you say that.

If I'd signed off on those accounts which such a material error, I'd probably be checking firstly the small print of my letter of engagement and then after that my professional indemnity insurance

It's certainly an area that we would have checked on any client where the output tax was other than at the standard rate i.e. part of the turnover was exempt, zero rated or at the lower rate or the flat rate was being applied. It is a simple part of the pro forma on reviewing year end accounts

 

[Jenni384]

I'm surprised you say that.

If I'd signed off on those accounts which such a material error, I'd probably be checking firstly the small print of my letter of engagement and then after that my professional indemnity insurance

It's certainly an area that we would have checked on any client where the output tax was other than at the standard rate i.e. part of the turnover was exempt, zero rated or at the lower rate or the flat rate was being applied. It is a simple part of the pro forma on reviewing year end accounts

I'd agree with that too.

I'm surprised you suggest that I simply shut down the company and restart another one - surely the HMRC will get their money by any means they can??

They will, but there are legitimate ways of shutting down one company and forming another one, and it's worth taking advice to see if you can do this. Companies are separate legal entities and if you do it properly, they can't pursue company 2 for the debt of company 1.

You need advice from someone who has all the facts, but I would definitely look into this as an option.

 

[Spongebob]

I'm surprised you suggest that I simply shut down the company and restart another one - surely the HMRC will get their money by any means they can??

It depends how you do it. I would definitely get a new company established tomorrow morning as a potential 'lifeboat' and then take advice on what to do from a good accountant experienced in the 'ducking and diving' school of accountancy!

We did seek advice from our accountant and also a VAT specialist friend from one of the big four. They both suggested that we make the declaration ASAP, just in case we get a letter on our door on Monday announcing an investigation! It seems like the HMRC are much more lenient if you announce the errors yourself.

This advice has a certain logic to it; however it is the logic of someone who doesn't have to stump up a hundred grand and who doesn't face losing everything they have worked for for the last ten years! Why would HMRC launch an investigation? The police don't dig up someone's patio looking for a body unless they have pretty good reasons for suspecting that there is one there. From what you've told us HMRC had no reason to suspect anything was amiss.

Two examples of the kind of accountant you don't need at a time like this; particularly the one who has been preparing your accounts and who should have picked up on this years ago.

I'm a little puzzled that you haven't had a VAT inspection in ten years...

 

[saxondale]

It depends how you do it. I would definitely get a new company established tomorrow morning as a potential 'lifeboat' and then take advice on what to do from a good accountant experienced in the 'ducking and diving' school of accountancy!



This advice has a certain logic to it; however it is the logic of someone who doesn't have to stump up a hundred grand and who doesn't face losing everything they have worked for for the last ten years! Why would HMRC launch an investigation? The police don't dig up someone's patio looking for a body unless they have pretty good reasons for suspecting that there is one there. From what you've told us HMRC had no reason to suspect anything was amiss.

Two examples of the kind of accountant you don't need at a time like this; particularly the one who has been preparing your accounts and who should have picked up on this years ago.

I'm a little puzzled that you haven't had a VAT inspection in ten years...

Spongebob - if I posted I had deliberatly not paid VAT and had it invested in a rather nice speedboat somewhere in the Med. rather than "not paid it by mistake"


what would you say then?

 

[Spongebob]

Spongebob - if I posted I had deliberatly not paid VAT and had it invested in a rather nice speedboat somewhere in the Med. rather than "not paid it by mistake"
what would you say then?

I'd say that you were a crook and deserve to get caught.

My advice is not for crooks - it is for people who find themselves in a mess and need to find a solution that will enable them to survive financially.

Are you suggesting that the OP is a crook?

 

[Jenni384]

My advice is not for crooks - it is for people who find themselves in a mess and need to find a solution that will enable them to survive financially.

Absolutely. The OP is in a mess and has asked about how to sort it out.

Saxondale I don't think it's useful to take this thread off on a tangent that isn't actually relevant.

 

[saxondale]

Absolutely. The OP is in a mess and has asked about how to sort it out.

Saxondale I don't think it's useful to take this thread off on a tangent that isn't actually relevant.

I think you`ll find the OP asked for advice with regard to paying HMRC not for spongebobs advice about "how not to pay".





So who is "off tangent"?

 

[Jenni384]

I think you`ll find the OP asked for advice with regard to paying HMRC not for spongebobs advice about "how not to pay".

OP has been given constructive advice about his situation. Sometimes the advice you ask for isn't actually the advice you need. Bringing in references to a different situation isn't relevant.

So who is "off tangent"?

You are

 

[tcj123]

I was in a very similar situation last year, I had been running a ltd co for over 10 years and a VAT inspection uncovered a small calculation error, which when multiplied by every transaction over 3 years, accounted to over £25,000. (They did an estimate at £40k but I did a detailed calculation.)

My accountant fought tooth and nail on my behalf and appealed against their findings, but the debt stood and with interest ran to over £35,000. My accountant had carried out an audit every year and had not uncovered the error. The VAT office said they would allow me 6-12 months to pay the debt off. I pointed out that it would take me at least 3 years, if not 5, as my turnover was reducing in the recession, but they stood firm.

I consulted a separate accountant who told me to go to an insolvency practitioner immediately. The insolvency chap told me to set up a new ltd co immediately and move my clients over asap before closing the first co. I did this, lost about 25% of my business in the move, but have managed to continue trading - the original accountant washed her hands of the situation, and the debt went unpaid. I spent over a year under considerable stress because of this situation, my accountant kept assuring me that the VAT office would accept a lower settlement figure, but they didn't - it was not worth hanging on and I should have consulted elsewhere much sooner - do take advice straight away and don't take out a personal loan to cover the debt - that's the point of having a limited company. Good luck.

 

[Alan R Price]

It would probably be illegal to transfer the business to a new company or other third party without paying proper value. It would be considered a fraud on the creditors. If you did it you could end up being made personally liable for the company's debts, disqualified from acting as a director; and/or subject to criminal proceedings. My advice is to seek specialist advice from an insolvency practitioner before you do anything - IPs help people stay out of prison and we save businesses. There is something called a company voluntary arrangement (CVA) which is a formal rescue process designed to save companies by rescheduling their debts with creditors. It may be that your company qualifies for a CVA. Alternatively if the business is not viable we can help you put it to bed with as little discomfort as possible.

It might be possible to "phoenix" the business in a new company or do a "pre-packaged" administration whereby the original company dies and you acquire the business in a new "clean" company - but these are minefields and need careful navigation - which we can help you with - or you could end up in deep trouble.

As in any profession, there are good IPs and poor ones. I would be happy to talk to you or have a meeting free of charge to discuss your options. No disrespect to anybody else here but I am a licensed insolvency practitioner and can give you specialist advice. Have a look at our website: www.marshmanprice.co.uk and read some of the testimonials. Then call me if you think you need help.

 

[MrPAYE]

Not being helpful to the OP here but I feel a rant is necessary

VAT is an extremely complicated subject, as is PAYE and most other taxes, with the UK having one of the most complex and voluminous tax codes in the world.

Why then do so many people like the OP think that such a complex and important part of being in business can be dismissed as nothing more than an inconvenience ???

I'm sorry but someone like the OP who has acted as a 'Know-It-All' (by having a look at the VAT rules and deciding they are doing things right without seeking proper professional advice), especially as the subject is fundamental to the financial success of his business, frankly deserves any problems that arise from this gung-ho attitude.

What is more astounding is that the OP comes on to a free and public internet forum looking for advice on what is a hugely significant issue. Has he not learnt by now that proper advice needs to be sought AND PAID FOR if he really wants to sort out the mess he has created ??



Rant over....

 

[Spongebob]

As in any profession, there are good IPs and poor ones. I would be happy to talk to you or have a meeting free of charge to discuss your options. No disrespect to anybody else here but I am a licensed insolvency practitioner and can give you specialist advice. Have a look at our website: www.marshmanprice.co.uk and read some of the testimonials. Then call me if you think you need help.

Experience has taught me to treat IPs with suspicion. However, Alan appears to be one of the good guys.

In your circumstances I would definitely take him up on his offer.

 

[saxondale]

OP has been given constructive advice about his situation. Sometimes the advice you ask for isn't actually the advice you need. Bringing in references to a different situation isn't relevant.

You are

feel free to lecture me on the difference between tax avoidance and tax evasion

 

[chalkycheese]

Hello this is a question related to the above thread. We are the subject of a tenacious investigation by HMRC over our VAT calculations on takeaway/eat in food. They are claiming we owe them 90k in underpaid VAT, a crazy amount that would have meant that our gross takings would have to have been around 40 percent higher than they were.
We are now a limited company ( which is going into liquidation) but the time in dispute is when I was a sole trader (2007) and my question is can they come after the current sole trader business, which runs as well as the LTD Co and which we are desperate to protect as it is the only survivor after 10 years of hard work and much personal investment, or any other assets in my own name. If there is an accountant experienced in the ducking and diving school of accountancy with any suggestions we would love to hear from you . Many thanks for reading.

 

[Homshaw]

It would probably be illegal to transfer the business to a new company or other third party without paying proper value. It would be considered a fraud on the creditors. If you did it you could end up being made personally liable for the company's debts, disqualified from acting as a director; and/or subject to criminal proceedings.

I was on the receiving end of a company that moved all its contract from one company to another paying a derisory sum. (About 20K for contracts generating sales of 200K)

They paid nothing for a fully furnished office and there was no effort to sell the contracts at market value

I complained to the liquidator who replied it was impractical to sell the contracts direct because the owner could simply approach the customers direct on behalf of the new company and he didn't feel the assets were worth persuing. His main concern was he had not received the 20K which he had earmarked for his fee.

The major creditor was HMRC for VAT and Tax but they seemed unconcerned.

I see from Companies House the new company's accounts are overdrawn.

From my experience I would think in practice you are not going to be sued or disqualified

 

[chalkycheese]

Thank you for this reply,very helpful.

 

[Spongebob]

We are now a limited company ( which is going into liquidation) but the time in dispute is when I was a sole trader (2007) and my question is can they come after the current sole trader business, which runs as well as the LTD Co and which we are desperate to protect as it is the only survivor after 10 years of hard work and much personal investment, or any other assets in my own name.

Unfortunately the 2007 sole trader business is the same as the current sole trader business i.e you. HMRC will come after you personally for all the money owed and your personal assets are very much as risk.

Urgent precautionary action is needed. I would set up a new limited company today in someone else's (your wife's?) name and transfer all current and future business activities into this company. This will at least ensure you have a business going forward.

You do not tell us about your personal financial circumstances but a £90k personal debt to HMRC would bankrupt most people. I fear that this could very well be you fate - and your best move.

Do you own a house? Is there equity in it? Are the mortgage payments up to date? Remember that if you are a sole trader the debts are yours alone; if the house is owned jointly only your share (half) of the equity is at risk. Many people these days manage to hold on to their homes even through bankruptcy if there is little or no realisable equity to interest the Official Receiver.

You really need to take specific professional advice.

Cheers
Bob

 

[chalkycheese]

Hello Spongebob Thank you very much for your reply. I have taken specialist advice from several people and have finally settled on an IP that I feel comfortable with. Some of the professional advice is conflicting /grey, it has been a bit of a minefield.
I no longer have a house and have very few other assets left.
The business that runs as ST is the only thing that remains after a disasterous expansion which has destroyed the company resulting in imminent liquidation.
In putting the ST into a LTD company will I have to change the name of the company ? The ST name is the same as the company going into liquidation, it has been trading for 4.5 years as a ST, there is also a LTD company already in existence with the company name plus the location ( so slightly different from the liquidating co ) that has not traded. Could we use this or would we fall foul of section 216 am so confused. Our business is food not company law and I feel all at sea with all of these decisions to be made.

 

[Homshaw]

Experience has taught me to treat IPs with suspicion.

Had a lady come to see me whose Limited Company had run in to trouble. She had paid all the bills out her own resources. The only creditor was the Directors Loan Account

Her Bank Manager suggested she see an IP who charged £6998 plus VAT to close the company down

This could have been done for £15. The were no external creditors to object.

They seem to do little for Creditors or the Company. They personally are the only party that ever seem to benefit which they do big time.

 

[Alan R Price]

chalkycheese

I am glad you have taken advice from an IP and hope that things work out for you.

IPs get a very bad press on here and I'm sure some of the criticism is warranted. I suppose we are there to get shot down: after all, in every insolvency case there are people - creditors, directors and shareholders - who lose large amounts of money, and it is natural to feel resentment for anybody who profits from the situation. We are however very heavily regulated and receive regular inspections by our licensing authorities to ensure we remain within the law and operate to best practice principles. Obviously there are some IPs who are not very good or who operate unprofessionally or in some cases illegally but most of these eventually get found out. I also agree that the big firms appear to charge unconscionably high fees.

In my practice we do a valuable job of saving businesses and jobs - although obviously some businesses simply cannot be saved. We also do a valuable job investigating misconduct by directors and pursuing them on behalf of creditors so we can pay dividends. I recently successfully sued a director for £50,000 plus costs for assets he had transferred to a phoenix company to get them out of reach of the creditors of his insolvent company. I am currently also suing a company and its director for £200,000 repaid to it by its insolvent associate company of which I am now liquidator.

Yes, I make a good living, but I seem to keep getting referrals from accountants, lawyers and bankers whose clients I have been able to help over the last 30 years; and also from directors and other people I have acted for - both in rescues and company burials - so I reckon I'm doing something right. Not all IPs are money-grabbing, heartless ba****ds. Some actually have a commercial and social conscience.

 

[Homshaw]

Where would I write to in order to complain about an Insolvency Practioner?

 

[Alan R Price]

Write to the IP's licensing body. This should be published on correspondence you receive from him/her. You should also be able to find it out by looking on his firm's website or by asking him directly.