Info from previous accountant

jilt

I received paperwork from a new client's previous accountant.

According to the schedule of fixed assets were:

Motor vehicles at cost £26,428, Depn to date £21525, NBV £4903

The following capital allowances had been claimed the previous year:

General Pool WDV bf £4784, WDA £957
Ford Ka WDV bf £632, WDA £127
Toyota WDV bf £1818, WDA £364

I asked my client about the cars because as far as I was aware she only owned the one car. She was very puzzled as she sold the Ka in 2004 and has no idea what the general pool comprised of!

Of course I went back the previous accountant, initially asking for a full breakdown of the FA in the accounts, and what was included in the general pool for capital allowances. 2 emails later and the reply was 'I can confirm that the balance of Motor Vehicles is for associate’s motor vehicle – this is also the only item in the pool for capital allowances'

My client has a driving school and other instructors trade under her name but all own their own vehicles. I have of course requested further information and explained that my client has informed me that the Ka had been sold back in 2004 but so far she has not responded. I have left telephone messages and forwarded emails but am not expecting a reply. Even the accrual for accountancy services in the last accounts was less than the actual invoice. How can this be when the invoice was raised 2 days after the accounts were produced?!

This accountant is also the previous accountant of another new client who himself has been trying to get information from her for a long time so I am not hopeful of receiving anything in response to my professional clearance letter.

Obviously my driving insctructor client is worried that there has been some expensive mistake made, expensive for her that is. What would you do in this situation? Which way forward?

Monsoon

I received some prof clearance from someone with a mistake, and she came back straight away, apologised and corrected it. My point being that I think you can tell from their initial response whether they are going to be helpful or not.

It sounds to me like you may have to make the best of a bad job and get it right going forwards.

The only other alternatives are for the client to pay you to review and possibly fix the prior years and/or make a complaint to the ex accountant and possibly claim on their insurance for the costs in getting it right (you have to give them the option to put it right themselves first).

I would avoid getting involved in the middle where possible. It's up to the client to take up with their old accountant issues they might have, and remember they may just want to chalk it up to experience and not pay anything more to look into prior years.

Good luck!

jilt

Thanks Jenni, and apologies for not thanking you before now.

Update - Have tried again to speak to this woman, am now told she only comes into the office to see clients and works from home the rest of the time. Have left more messages and emailed and am not expecting a reply.

I've never encountered this before and am not sure how to proceed. It's clear that capital allowances have been claimed that weren't due and I don't want to be the cause of an investigation for my client. Do I have a duty to inform someone other than my client of this, or could I just claim the correct allowance from this year and ignore what has happened previously? Am also concerned about the balance sheet as the value of fixed assets will be incorrect there too.

And advice would be greatly appreciated or should I call the AAT?

jilt

I received an email from the previous accountant last night:

'In October 2010 we had a computer failure which resulted in loss of all excel related backup files on our network where this information would have been stored.

We ourselves are having to make any adjustments we feel necessary to our own clients information and we are therefore unable to assist further and would suggest you make any amendments you feel necessary based on information supplied by yoour client'.

The accountants report for my client's 2010 accounts is dated 23.11.10!

Monsoon

jilt wrote: »

I received an email from the previous accountant last night:

'In October 2010 we had a computer failure which resulted in loss of all excel related backup files on our network where this information would have been stored.

We ourselves are having to make any adjustments we feel necessary to our own clients information and we are therefore unable to assist further and would suggest you make any amendments you feel necessary based on information supplied by yoour client'.

The accountants report for my client's 2010 accounts is dated 23.11.10!

I think that says it all: get it right going forwards. It's up to the client if they want to go back to the previous acountant and get the previous year fixed (if this needs doing) or if they want to pay you to check it.

jilt

Monsoon wrote: »

I think that says it all: get it right going forwards. It's up to the client if they want to go back to the previous acountant and get the previous year fixed (if this needs doing) or if they want to pay you to check it.

So I've no obligation to report the incorrect capital allowance claims to anyone other than my client?

Monsoon

jilt wrote: »

So I've no obligation to report the incorrect capital allowance claims to anyone other than my client?

I've just gone back and read the OP.

I don't think so. Even though the disposed cars were included in the accounts, you don't know whether the tax has been under or over claimed because you don't know the specifics of the claims throughout the years. It might be that she's lost money (through changes in tax rates or loss on disposals etc). Or it might be that she's overclaimed (no proceeds on disposals claimed).

It's the client's responsibility to get it right. She in turn trusts her accountant to get it right. You have an obligation to tell the client there may be an issue. She is not deliberately cheating the taxman (and indeed we don't know if she has under or overpaid tax) so there is no MLR issue. It's her choice to either pay someone to analyse prior years and get it right (unlikely) or just get it right going forwards. She could always cause a fuss with her ex-accountant and ask them to look at it but this is unlikely and is probably more hassle than it's worth. And their records are incomplete due to the computer problem.

In the case of the cars in the pool she no longer has, I would be inclined just to remove those values from the pool at nil gain nil loss (i.e. just delete the data). You can't do a proper disposal as this relates to prior years, so I would just re-state the pool with the car she has. Best of a bad job and get it right going forwards.

Advise the client what you think is the best course of action, advise her of her other options and the potential consequences and costs of all those, and let her decide. She may want to get it right as she may be owed higher allowances, who knows.

jilt

Thanks for your reply Jenni, I had initially wondered about any loss on disposals and then forgotten about it when posting on here. I'm going to prepare her accounts including the one car she currently has and arrange a meeting to explain. She is already aware as I went back to her when I first received the computations from the previous accountant to check exactly how many cars she had.

If she decides not to persue the previous accountant and just go forward, which I suspect she will, then at least I'll have all the necessary paperwork with me for her to sign.

deanshepherd

I would advise against going back to the previous accountant. I would be unlikely to enter into such a discussion with a former clients new adviser; although I certainly wouldn't make up some story about lost data to cover my mistakes!

Having old assets hanging around on a CA comp (or FA ledger) is not that unusual. Clients often fail to mention they bought a new car, even when asked they may forget which tax year and how much they sold the old one for so these things do not always get picked up.

I wouldn't be giving away possible allowances now though. See if client can remember approximate dates and amounts for the disposals and make the adjustment in the current year. Or consider an error or mistake claim if you feel it is worth the effort.

Monsoon

deanshepherd wrote: »

I wouldn't be giving away possible allowances now though. See if client can remember approximate dates and amounts for the disposals and make the adjustment in the current year. Or consider an error or mistake claim if you feel it is worth the effort.

See, without the actual data of what was submitted, how can we be sure that this is accurate? I would guess that with no disposal proceeds, chances are CAs have been overclaimed. I think looking into the past is opening a potential can of worms - but if the client wants to pay for it, that's their choice.

jilt

Monsoon wrote: »

See, without the actual data of what was submitted, how can we be sure that this is accurate? I would guess that with no disposal proceeds, chances are CAs have been overclaimed. I think looking into the past is opening a potential can of worms - but if the client wants to pay for it, that's their choice.

Year the worm thing is exactly what I don't want to do, I very much doubt she'll want to go back, she said it was very hard getting any info out of her previous accountant, of she asked a question she never got an answer. When I brought up the subject of the cars she was worried that it was an expensive mistake, expensive for her!

Thanks for your comments both of you, I'll have a chat with my client and take her instructions.

deanshepherd

Monsoon wrote: »

..chances are CAs have been overclaimed.

Agreed.

Monsoon wrote: »

I think looking into the past is opening a potential can of worms - but if the client wants to pay for it, that's their choice.

Is it their choice?

Tax underpaid.. You become aware through your business dealings.. Not advised client of potential underpayment.. Have advised but client chooses not to open that can of worms..

Let me check that money laundering toolkit again!

Newbie

if it turns out that tax is underpaid give consideration to the penalties regime for prompted and unprompted disclosures

Monsoon

I'm going to try and explain further, as I don't think I got my point across properly before. I'm in no way advocating MLR or evading tax.

My point is that can we really find out the perfect position if Jill goes back and tries to calculate prior years? There are clearly a number of items in the CA pools. The Ka, for example, has a very low WDV. Now, is that because it's just been 'depreciated' over the last 7 years or is it because disposal proceeds were added back to the Ka pool but she left the pool running? We aren't going to get the schedules from the previous accountant and there will just be an amalgamated figure on past tax returns that we can obtain from HMRC. That is the can of worms I would think very carefully about opening. Would you reopen prior years if you were just going to do a best guess analysis? I'd be loathe to do that unless there were very good reasons, or it was obvious everything was totally wrong.

I'm trying to be pragmatic. In a perfect world everything would be done 100% correctly. We live in an imperfect world and therefore must do as best we can, taking into account a balance of accuracy and pragmatism. You cannot make a silk purse out of a sow's ear.

Let's face it, Jill will have to quote the client for going back and doing an analysis. And she will have to say that there is no real way of getting it correct, it will just be an estimate for comparisons of the WDV.

The client may want to do this for peace of mind (and as newbie says, the penalty regime, though if this goes back to 2004 then the old rules will apply to much of it). They might also not want to incur the cost for a best estimate, given that amendments will run up a red flag with HMRC. And most years are out of time, too.

We all want our clients to have the best tax affairs we can, and we've all picked up new clients only to see a previous advisor may have made some gross errors. It happens. Sometimes it is just not possible to go back and correct all that, for a variety of reasons.

Each case should be taken on the specific facts and due consideration given to each, but sometimes practicalism and realism should take precedence over perfectionism. Only Jill knows the full facts here, and only Jill can tell her client all of the options and consequences and then act accordingly with due consideration to client care, ethics and MLR obligations.

Let's be honest, neither SOCA nor HMRC are going to a darned thing about a report that says "looks like clients previous accountant got CAs wrong, probably over claimed them but haven't got a clue, client doesn't want me to investigate, previosu accountant will probably fob client off, and anyway it would only be a best estimate if I did anyway." Filing a SAR will actually be less of a red flag than telling HMRC the last 7+ years may be utter rubbish (which they may or may not be).

I'm not advocating dodgy ethics, I'm just trying to be realistic.

deanshepherd

Monsoon wrote: »

We live in an imperfect world and therefore must do as best we can, taking into account a balance of accuracy and pragmatism.

Agreed. But how many people can't remember roughly how much they bought their last car for? I could probably give you a rough idea for the last five cars I've bought. I would work with the client's best guesstimate rather than pretend no-one even cares.

Monsoon wrote: »

Let's be honest, neither SOCA nor HMRC are going to do a darned thing about a report that says "looks like clients previous accountant got CAs wrong, probably over claimed them but haven't got a clue, client doesn't want me to investigate, previosu accountant will probably fob client off, and anyway it would only be a best estimate if I did anyway."

Risky assumption in my opinion. SOCA may not care (although it would be a criminal offence not to report if client chose to sweep it under the carpet) but HMRC have no de minimus for underpaid taxes.

Monsoon

deanshepherd wrote: »

Agreed. But how many people can't remember roughly how much they bought their last car for? I could probably give you a rough idea for the last five cars I've bought. I would work with the client's best guesstimate rather than pretend no-one even cares.

Not necessarily disagreeing, but playing devil's advocate: we're numbers people. We're supposed to remember stuff like that. I bet a lot of people don't though. As it happens, I don't actually remember all the purchase and sale values of my last five cars. I could guesstimate it, but I don't remember.

It's not about pretending no-one cares, it's about putting the situation to the client, making them fully aware of all the issues, and seeing what happens. The client may be so worried they want Jill to re-do all prior years. They may not.

If it was just the one car then yes, if they remember dates and values, you could extrapolate something, but there are various pools with various amounts and we don't know what's in some of them, so I think it could be dangerous to do it unless you're sure; I wouldn't want to change something in either direction unless I was confident of my numbers and I don't know whether I would be in this case.

What if the best guesstimate said the client owed HMRC £1000, but the reality is they only owed HMRC £500? We'll never know, but I'd feel bad - Accountant 1 got it wrong in one direction and then we get it wrong in the other direction. Neither is correct, both accountants got it wrong.

I wouldn't want to do 'nothing,' but at the same time I wouldn't necessarily be confident of the 'something' based on the information provided.

I'd definitely put it to the client, and see what they wanted to do.

deanshepherd wrote: »

Risky assumption in my opinion. SOCA may not care (although it would be a criminal offence not to report if client chose to sweep it under the carpet) but HMRC have no de minimus for underpaid taxes.

Not risky: that's my whole point. If the client says "No, please leave it alone" you submit a SAR if you have a suspicion as per the MLR. SOCA won't care, legal obligation taken care of. The SAR will either say "I think it's wrong" or "I think it's wrong and it's £x but that's only an estimate as it's impossible to get the right figure." Both are of limited information and value.

SOCA may pass the info onto HMRC, who may or may not do anything about it (as if they receive info from SOCA, they will receive A Lot of it!). There is no legal or 'official ethical' obligation for an agent to report anything direct to HMRC that I am aware of (I had it drummed into me as a child not to be a grass, so much as I'd somtimes like to shop tax evaders, I personally don't, as it just goes against the grain). I do of course comply with my obligations under MLR.

I would guess that HMRC probably do have an unofficial/ discretionary de minimis or a 'we don't care' level - I submitted an error or mistake claim where a client finalised some figures and they owed the taxman £9. HMRC never pursued it and accepted the estimated figures. Likewise I amended a P11D for an extra £260 of Class 1A NI and the client paid it. It's still showing as an overpayment despite my best efforts to get it allocated.

Monsoon

I also want to say I really don't like disagreeing with Dean. It feels wrong!

deanshepherd

It IS wrong to disagree with me.

I am practically perfect in every way.

Monsoon

You and me both, matey

Monsoon

MLR toolikt, sections 6.4.1 and 6.4.3. I do not believe there is an obligation to report to SOCA based on this guidance. Any errors were genuine mistakes and there is no intent to evade tax as there is no definite knowledge that tax has been underpaid. There is no criminal act or criminal proceeds if the client does not instruct the agent not to undertake a prior year reconciliation.

jilt

Many thanks for all your comments, but in particular to Jenni who gave up her precious time to talk to me and check out further in the toolkit. Will definitely renew my MLR certificate with AAT in February and get hold of their toolkit.