HMRC Bad Debt Tax Investigation Reveals Previous Advisor At Fault and Results in Zero Tax Bill and NO Penalty for New Cooper Bradshaw Client

A recent investigation has astounded even hardened tax investigators at Cooper Bradshaw as to the incompetence of a new client’s former advisor.  The client was faced with an investigation by HMRC into his previous tax return for bad debts written off, together and a potential tax demand in excess of £6,000 and potential penalties amounted to around £1900.

During the investigation our team uncovered poor advice from the previous advisor, discrepancies in accounting calculations and an end result for our team which included no additional tax to pay, no penalty fees payable and a possible counter claim against the said previous advisor.

Mr Edwards, a self-employed haulier from Kent sought advice from Cooper Bradshaw on a separate matter as his current advisor Mr Williams was unavailable to assist.  Shortly after, and with no relation to the original enquiry, Mr Edwards received a letter from HMRC requesting a previous tax return be checked as they believed Mr Edwards owed HMRC in excess of £6,000 in unpaid tax against a claim amounting to £38,295 in bad debts.  Had this been the case Mr Edwards would have owed HMRC tax outstanding in the region of £6,000 and faced penalties of more than £1,900. 

Cooper Bradshaw undertook an investigation and carefully compared the original tax return prepared by Mr Williams with an analysis of the same documentation obtained by Mr Edwards from his previous advisor and presented in as far as he could tell the way he had presented it to his former advisor.

Although we agreed with the former advisor’s turnover figure for that year – in the region of £145,000- it soon became clear that there were major discrepancies and potential errors namely:

  • Disallowable allowance of £2,600 but with no evidence found within his expenses, invoices, receipts or credit notes to validate this.
  • Despite running a haulage business the previous advisor did not account for any parking or toll charges yet Cooper Bradshaw accounted for some £1,301.00.
  • A paltry £80.00 claimed against repairs, renewals and equipment (with a disallowable expense equating to a sum greater than £80.00). However, we calculated Mr Edwards had expenses in this tax year in excess of £16,240.00.
  • The key discovery was that unrecovered debts only equated to £2,940 – a far cry from the Edwards’ £38,294. This in turn created a return with a profit of more than £6,500 rather than a loss of nearly £8,000 as per the previous advisor’s calculations.

 

The investigation was hindered by the apparent reluctance of the previous advisor to react to the initial investigation letter from HMRC, dated 23 November 2015.  Fortunately, HMRC extended the deadlines but it took another two and a half months – until 16 February 2016 for Mr Williams to respond squarely placing the blame on his previous client’s shoulders and claiming illness for his inability to contact Cooper Bradshaw in November or to respond to HMRC’s initial letter of enquiry.  However his calculations and workings in relation to the original tax return have remained unforthcoming.

Now, eagle-eyed readers might think that Mr Edwards was lax in presenting his paperwork to his previous advisor or had missed vital documents.  Not so.  Mr Edwards has dutifully packaged up his paperwork into monthly folders – something he has always done – regardless of who his advisor had been.  In addition, Mr Edwards had no recollection of a conversation with Mr Williams regarding nearly £40,000 of bad debt (which equates to nearly 26% of his turnover) and says he would definitely be aware if it was in fact to amount to this staggering figure.  Of course HMRC will say that Mr Edwards has an obligation to check his own tax return prior to submission but Cooper Bradshaw argues that if he was not receiving any qualified guidance, how could he be expected to understand its content?

Ben Laws, Director of Cooper Bradshaw, commented: “It is a professional advisor’s duty to explain to their client how his or her tax return is calculated and to discuss any potential issues which might elicit questions from HMRC.  In this instance that was clearly not the case.  Fortunately, our team was able to provide an accurate summary for HMRC and a revised return which saved our client in excess of £8,000, together with a claim for fees already paid to his previous advisor”.

If you have concerns about your tax return calculations or have received an enquiry from HMRC please contact Cooper Bradshaw…..

[Names in this article have been changed for privacy reasons]

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