VAT enquiry

[MikeB03]

Hi,

I'm looking for some advice on the best way to proceed in my situation.

I have been trading online since 2017 across various platforms and have been VAT-registered and operating as a Limited Company from day one. Recently, I received an unexpected phone call from HMRC. The person introduced himself as working for VAT Investigations and informed me that my company had been selected for a routine VAT investigation.

I answered his questions about my business and how it operates without going into too much detail. The next day, he sent me an email (from an official HMRC domain) with a list of required documents, including VAT transaction histories for certain years (all within the last three years). To verify his identity, I called the usual HMRC helpline, and they confirmed that he does indeed work there and that the number he called from was his official HMRC work number.

My records are in order, with one significant exception. Since 2013, I have used an online platform for personal buying and selling, typically generating £2,000 to £4,000 per year in sales from personal items, along with some purchasing activity. However, in 2020, I made the very poor decision to start using that platform to sell some of my business inventory while sending the funds to a private account. This continued in 2020, 2021 and 2022, during which time I generated £170K in revenue on this platform in total over the course of those years.

Meanwhile, my properly registered and accounted-for sales channels produced just over £3M in revenue in combined total during 2020,2021,2022. As a result, these unaccounted sales represented about 6% of my total revenue over the three-year period. Unfortunately, all funds from this platform were deposited into a personal bank account, and VAT and corporate tax were not accounted for. However, in 2023, I updated my details, converted the account on the sales platform in question to a business account, and began properly reporting all sales from that platform, which remains the case to this today.

Given the VAT inquiry, I have already admitted to selling on this platform but have not specified the exact years. Also the deposits are in my bank statements for the limited company so its very obvious. The inquiry is requesting revenue details from all possible sources for the last three years and I am so very sure they will find out about the account usage in those previous years.

I believe my best course of action is to calculate the VAT and corporate tax I owe and submit this information proactively as part of the inquiry. Surely, if I wait for HMRC to discover the discrepancy themselves, the consequences will be far worse?

I understand that I made a serious mistake with this account and am looking for advice and also what kind of penalty to expect from HMRC if I take action first before they bring this to my attention and say that I haven't reported it when asked for it. I also understand that if the unpaid tax exceeds £25K, HMRC may publicly "name and shame" me as part of their enforcement action.

I do have an accountant who does my Corporate tax and VAT submissions and I have not shared any of this information with them just yet. Also I am not sure how an accountant would react in this situation. Is it likely they would not longer want me as the customer due to this issue? So on top of this I would be looking for a new accountant?

 

[JEREMY HAWKE]

I'm no expert but the" name and shame scheme" is aimed at those that deliberately try to get away with it.
You don't come across as one of them
It would worry me if I could not or did not share every part of the business with the accountant

 

[Ziggy2024]

HMRC can charge up to 100% of the tax due as a penalty for this kind of omission. Mitigation will be given based on certain factors (disclosure by the taxpayer being one of them).

In terms of the accountant did they ask about these unusual deposits? Are you sure they didn't already account for them as sales within the accounts? Were there any adjustments to your figures when they completed their work?

 

[MikeB03]

HMRC can charge up to 100% of the tax due as a penalty for this kind of omission. Mitigation will be given based on certain factors (disclosure by the taxpayer being one of them).

In terms of the accountant did they ask about these unusual deposits? Are you sure they didn't already account for them as sales within the accounts? Were there any adjustments to your figures when they completed their work?

Ok therefore I understand if I say nothing at this time I will definitely get 100% fine, however it may be reduced if I fully declare everything. I think VAT will come to around £28k in total for 20, 21 and 22 so the worse case I am looking at is around £56k bill? I guess there will be interest too so probably £65k?

Accountant never saw any of this trading activity from 20,21,22 because money from the sales platform was being sent to a private account and the transaction exports/lists were not presented. I did begin to make things right by putting the sales from that platform into the business account from 2023 onwards and accountant is only aware of this additional platform from that point onwards.

 

[MikeB03]

I'm no expert but the" name and shame scheme" is aimed at those that deliberately try to get away with it.
You don't come across as one of them
It would worry me if I could not or did not share every part of the business with the accountant

In summary I did not properly declare ~6% of my turnover during 3 specific years and did not share that with an accountant. Now I am keen to understand the best way to make things right given the VAT Enquiry taking place. I am also worried about potentially having to look for a new accountant. I am not sure how accountants typically react to such a situation. Would they be happy carrying on?

 

[ChrisCallaghan]

In summary I did not properly declare ~6% of my turnover during 3 specific years and did not share that with an accountant. Now I am keen to understand the best way to make things right given the VAT Enquiry taking place. I am also worried about potentially having to look for a new accountant. I am not sure how accountants typically react to such a situation. Would they be happy carrying on?

Hi @MikeB,

Accountants are human, so naturally each will react differently.

Any half decent accountant I've worked with over the years won't drop you as a client over this - if they do then they are not an accountant you want to stick with long term anyway.

Personally I'd recommend setting up a meeting with your accountant ASAP. Naturally this additional work will fall outside any payment terms you have for agreed services. If for any reason they are unwilling to assist you in this, I'm happy to make recommendations.

 

[DWS]

Ok therefore I understand if I say nothing at this time I will definitely get 100% fine, however it may be reduced if I fully declare everything. I think VAT will come to around £28k in total for 20, 21 and 22 so the worse case I am looking at is around £56k bill? I guess there will be interest too so probably £65k?

Accountant never saw any of this trading activity from 20,21,22 because money from the sales platform was being sent to a private account and the transaction exports/lists were not presented. I did begin to make things right by putting the sales from that platform into the business account from 2023 onwards and accountant is only aware of this additional platform from that point onwards.

As an Accountant I agree with what Chris said, I certainly would not just drop a client because there is a VAT enquiry and there are problems with some missing turnover.
But it is important that you set up a meeting with your Accountant ASAP to go through all this, then let them make up their own minds if they wish to proceed or not, it may be that they can contact the VAT inspector and ask for more time while they go through all the figures as it will not only be the VAT but also the affect on the end of year accounts and the C/Tax.
One concern I would have is when you say ‘I did begin to make things right from 2023 onwards’ that seems that you were aware of the mistake but did nothing to rectify the previous years which may mean HMRC take the view that the unpaid VAT was deliberately concealed.
Also the question is, would you be declaring this income if you did not have the VAT inspection? which also would mean that this has been ‘prompted’ by HMRC.
Just have an honest chat with your Accountant and see what they advise.

 

[Gyumri]

As the above posters have stated it's time to come clean and rectify the issues that you accept have gone wrong. You will need to submit Error and Correction forms to account for the underpaid vat and I would do that asap as you will have to do it anyway.

There may well be some penalties and interest imposed for the under declarations so look up the scale of charges on the internet - but your responsibility now is to put things right without any further concealment.

 

[UK Contractor Accountant]

The person introduced himself as working for VAT Investigations and informed me that my company had been selected for a routine VAT investigation.

This was not a routine selection for Inspection - Targeted!

Online platforms, including eBay, AirBnB and Amazon share information about sellers and their earnings with HMRC.

 

[MikeB03]

This was not a routine selection for Inspection - Targeted!

Online platforms, including eBay, AirBnB and Amazon share information about sellers and their earnings with HMRC.

Yes, I am aware that is often the case. My turnover from all platforms apart from one is reported and VAT paid with full accuracy for all years. Also my company was registered in 2017 and this is the first inspection which is also rare for a company to not be expected for so long.

 

[MikeB03]

As an Accountant I agree with what Chris said, I certainly would not just drop a client because there is a VAT enquiry and there are problems with some missing turnover.
But it is important that you set up a meeting with your Accountant ASAP to go through all this, then let them make up their own minds if they wish to proceed or not, it may be that they can contact the VAT inspector and ask for more time while they go through all the figures as it will not only be the VAT but also the affect on the end of year accounts and the C/Tax.
One concern I would have is when you say ‘I did begin to make things right from 2023 onwards’ that seems that you were aware of the mistake but did nothing to rectify the previous years which may mean HMRC take the view that the unpaid VAT was deliberately concealed.
Also the question is, would you be declaring this income if you did not have the VAT inspection? which also would mean that this has been ‘prompted’ by HMRC.
Just have an honest chat with your Accountant and see what they advise.

I do all the book keeping myself and then send it to my accountant each quarter along with all raw sales data and raw calculations, including bank statements for cross checking. There are never any big discrepancies after the accountant completes cross checks before submitting. So I am very capable to calculate the missing VAT myself, but I will ofcourse want to do the process where I calculate it as usual and present it to accountant before giving it over to VAT inspector.

Yes I understand there is more work than just VAT. My main worry is and what I don't fully understand, how would the fact that essentially company funds were being sent to a private account be viewed? As a loan from the company to the director which must now be repaid right away?

 

[DWS]

I do all the book keeping myself and then send it to my accountant each quarter along with all raw sales data and raw calculations, including bank statements for cross checking. There are never any big discrepancies after the accountant completes cross checks before submitting. So I am very capable to calculate the missing VAT myself, but I will ofcourse want to do the process where I calculate it as usual and present it to accountant before giving it over to VAT inspector.

Yes I understand there is more work than just VAT. My main worry is and what I don't fully understand, how would the fact that essentially company funds were being sent to a private account be viewed? As a loan from the company to the director which must now be repaid right away?

Which is why you need to sit down with your Accountant and go through all this, it may be a case that they want to amend the previous accounts depending if they see the amounts as ‘material’ or they may need to do amendments in the latter years.
The money you received can only be treated as a loan now, it can’t be salary or dividends, but then you have the added problems that the loans should have been reported on the Company tax returns and S455 tax paid to HMRC until the loans were repaid also you personally should have been paying interest on these amounts as above £10k

 

[MyAccountantOnline]

I echo much of what's been said already - get all of the necessary information together and tell your accountant exactly what you've done and then work with your accountant disclosing all taxes underpaid to HMRC - VAT, Corporation tax etc. Make it a priority it needs to be dealt with now. Ask your accountant to explain exactly what penalties are involved and how you can minimise them.

 

[MikeB03]

Which is why you need to sit down with your Accountant and go through all this, it may be a case that they want to amend the previous accounts depending if they see the amounts as ‘material’ or they may need to do amendments in the latter years.
The money you received can only be treated as a loan now, it can’t be salary or dividends, but then you have the added problems that the loans should have been reported on the Company tax returns and S455 tax paid to HMRC until the loans were repaid also you personally should have been paying interest on these amounts as above £10k

I really appreciate the detail of this reply. I am arranging a meeting with accountant.

 

[UK Contractor Accountant]

https://assets.publishing.service.gov.uk/media/5e3169cb40f0b60917d6584d/CC-FS20.pdf