I work at a charitywhich is not currently VAT registered but has a cafe which has been running for years and is part of the charity, as opposed to being a sepearte ltd company. The cafe has not been paying VAT on its incoming, even though it has been over the VAT threshold, and I believe the accountant has not been stating the full income in the balance sheet.
The director plans to register the charity and set up the cafe as a trading wing and start paying VAT, but to 'ignore the past' and not come clean about not having paid VAT. The amount we could owe is around 120,000 at least. The director claims he's stumbled into this through ignorance but I suspect HMRC will not take this view.
My questions are:
1- How serious an offence is he commiting by not declaring this VAT
2- Are people who know about this working under him liable to get into trouble as well?
Did this charity need to be audited. If so, was it and why was this ommission not picked up by the auditor.
Whilst auditors do not need to be tax experts the complete ommision of VAT for this business seems to me a pretty big thing to miss.
HMRC will not care whether they bankrupt the charity and the directors to get this money (plus no doubt penalties, surcharges and interest which can often add up to substantially more than the original amount (On a different scale HMRC (mis)calculated a £3k debt on one of mine that with interest, penalties and surcharges became £15k).
Under the supply of goods and services act (1982) the charity may have a claim against the auditors and any other financial professionals who have been involved with the business. I say may have a claim against the auditors as the engagement letters can build in quite major get out of jail free clauses built into them.
It is unlikely that any non financial professionals would get caught in the immediate fallout but in paying this debt the entity may cease to be a going concern so it could affect everyone involved in that way.
Ignorance of his responsibilities however does not excuse the director who is ultimately responsible for the company. He will be the one that HMRC go after. Anyone else who is sued will be down to him to sue for negligence in order to recoup some of the loss.
If the charity needed to be audited and was not then it is doubtful that the director will be able to distribute the blame as it was their responsibility alone to appoint the auditors and in not doing so it can be argued that the reason that the issue was not picked up in a timely manner is purely down to them.
From the sound of this I would give your suppervisory body a call to ask the legal department for advice.
Just as a foot note, note that PII will only cover you where it was in place when the work in question was being done. PII taken out now would not be retrospective.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Shamus, just checking my own MLR understanding here - if Zak was self employed he would have to report this to SOCO, but as an employee is not under this requirement?
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Jenny
Responses are my opinion based on the information provided. All information should be thoroughly checked before being relied on.
Even if he is employed he still needs to report it as a professional, however, Zak needs to decide if it is done on purpose, or is it just a missunderstanding or error.
It is not as straight forward if you are employed, but the directors could say they hired a bookkeeper to look after these things as a professional, or the HMRC in an expection may ask why this was not noticed and fixed/reported by the professional.
Either way, understating the income on a balance sheet, VAT registered or not, is a warning sign.
Like Shaun says, contact your professional body if you have one.
As far as I know, even though they are charitable institutions, all the more do they need to be audited regularly. Being exempted from tax, it would be harder to track down the flow of money within the system.
It is but right to keep track of the money so as to allocate them properly. And the cafe that functions within the institution, that is not exempted from vat as it caters to the community and functions as a market.
charities do receive various tax reliefs but they are not exempt from tax on profits.
Refer to this page from the HMRC website :
http://www.hmrc.gov.uk/charities/tax/basics.htm
They must still file annual returns with HMRC and Companies house and even where entities are not audited directly HMRC will instigate investigations either at random or where something is felt amiss which take the form if not title of an external audit.
The VAT question espechially in relation to the Cafe is taken quite seperately.
How do charities work in the US? Are they totally tax exempt?
All the best,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
