Basically a few years ago he started running his own garage ( sole trader ), shorlty after started 1 employee, both working at his home/garage. Due to naivety and poor book keeping, he found himself investigated and now has to be VAT registered. This is a small enterprise, barely just surviving as it is.. Becoming VAT registered has lost him a lot of work through higher prices, some customers just havent come back.
Anyways. He's now being faced with a huge tax bill, and a VAT bill for approx 2-3 years previous. He wasnt collecting VAT, and was never aware he had to. As you can imagine, this is now a very traumatic time, and after over 15 months of investigation, they still havent given him a figure other than his own personal tax bill + penalties which is into 5 figures.
He has almost worthless assets, his home/garage is in negative equity. Overheads to run the place, business rates etc are mental ( Garage is at same location as house and he spent 2 years and lots of money getting it all legit for working from, hence business rates )
Will HMRC effectively bankrupt him for no gain, ie they will never see any money, or do they ever use common sense in these matters ?
His accountant/tax adviser ( nominated because of the investigation ) seems to offer no help or advise to this end at all, although has been very helpful throughout the investigation. They basically just say you have to pay whatever they say. You cant argue, you cant do anything exept pay.
Banks wont lend small businesses who do operate in profit nevermind those continually operating in the red. And any legitimate institution in their right mind wouldnt lend him the amount of money he's expected to owe given the level of debt he's already in from just trying to survive.
So what on earth are his options ? There just seems to be nobody to offer advise ? I know from other experience the Citizens advise offer no help to business, only private individuals. But there have to be some people to give honest advise out there ?
Get himself a bloody good accountant that can explain it in greater detail to him and tell him his options (if any). And yes I would think HMRC could make him bankrupt which is why he needs to seek professional advice on an independent accountant not just one that has been appointed to him.
If hes been trading for 3 yeas or so did it not occur to him to actually get an accountant and pay his tax, or get a tax refund if any due? Unfortunately if there are poor records and it looks like there is a profit then HMRC will be after the money unless he can prove that he has legit expenses ie machinery, tools etc for the business that can go against the income, to reduce his tax liability. Also you said he has one employee, has he paid him, has he been doing the payroll himself, and if so has he been paying over the employees tax/NI to HMRC every month? This will soon add up if he hasn't. If he had had an accountant at the beginning or even a good bookkeeper they would have told him about the threshold for VAT and then he could have registered when he was near the threshold. Unfortunately now he will have fines and interest to pay on top as well.
I am not a tax expert by any means, so hopefully Shaun will be along soon to help out with the answer. I think there are lots of things to consider in all of this and he really does need to get professional advice on this one otherwise he will be digging a deeper hole.
Hindsight is a great thing but unfortunately he should have dealt with this a few years ago.
Having to be VAT registered means that he has a business turning over approx £70k (not an insignificant business).
Simply saying I didnt know what I had to do or I never got round to it doesnt cut the mustard with HMRC.
The best thing may be just to go bankrupt and start again with a clean slate rather than dying a death by 100 cuts. Get a consultation with an insolvency practitioner. Will probably cost a few hundred pound but will be worth it.
One of my clients has been in (effectively) just this situation in the past: HMRC v him => personal bankruptcy.
Talking through the trauma of the events when he first became my client, he was in no doubt at all. In essence:
You can't win against HMRC when you're legally in the wrong.
If you can't pay what HMRC want, accept that you're to be made bankrupt. You may have been stupid but you're not criminal.
Work through bankruptcy until you're dischaged. Not nice and not easy but they don't hang you.
Start again; be wiser; be energetic.
This is what he did and, 2 years after starting again, he has a very nice, energetic (& profitable) sole trader business. It it was personally bruising and the ego didn't like it, but he was determined not to feel like a criminal. The legal machine and HMRC weren't ever unpleasant with him about it; it was a process and he got through it. He is convinced that trying to avoid the inevitable is always the wrong way to go and would probably have finished him and his marriage.
He really needs to sit down and talk to an accountant and pay them for the adviCe in my view :)
-- Edited by Rhianrach on Sunday 17th of February 2013 08:59:34 PM
oops...
he has been paying an accountant to deal with the entire matter. And as I said, whilst they have been very helpful in dealing with HMRC and sorting the books. They have offered no help or advice whatsoever when it comes to how he might actually pay what is owed, other than "you just have to pay it"
Which when it's looking to be in the region of 30-40k all told....well, most people dont keep that sort of money in their back pockets. And a substantial part of the VAT bill...he never collected or charged it in the first place, so that will have to be plucked from thin air too.
He had an accountant ( a very bad one ) and was paying tax. Clearly not what he was supposed to be paying though
The current accountant is employed by him to try and resolve the matter, he is paying for this. They were not appointed to him. Hence the annoyance at the lack of advice forthcoming
The most irritating thing is....if you owe HMRC millions, they waive at the drop of a hat. If you're a mere mortal, they're quite happy to push you over the edge into bankruptcy and they get nothing, or perhaps worse. The stress over this really is pushing him to his limits.
Thanks MarkS, that's the sort of info I was asking for. Who to actually speak to who might give proper advice under such circumstances.
As for the business being profitable, it's been running at a loss while he tries to build it up. He's re-mortgaged to keep it going and has substantial card debt just trying to get it to a level where it can start to work, which it was doing until this investigation started. And it's causing it all to fall apart again.
To go bankrupt is an option, but HMRC will get nothing, as there's easily £50k negative equity in the property etc.
He wants to make every effort to pay....but how to is the problem. As AICB says...maybe just chucking the towel in is the best option. That can be taken two ways unfortunately.
You can advise him that HMRC are normally quite happy to discuss staggered payment arrangements for significant sums of back tax. They'll charge interest, but their priority is to get the money that is owed to the Government, not to let it go.
@ Hendy. He was not collecting VAT in any shape or form. He isnt blaming HMRC, is accepts he is in the wrong, but lets be realistic about it. Could you afford to pay a 30-40k bill at short notice ? Could you find a lender to lend that to any small business or individual who already operates within their meagre overdraft most of the time and has substantial other debt ?
Bankruptcy would be the last resort. A relative has already gone through this due to buying properties, and it wasnt nice. And in order for him to continue working, it would make it virtually impossible. Which would almost make it pointless As for HMRC gaining anything from that...they wouldnt either. There simply isnt any equity worth talking about in any of his possessions, as as said, his mortgage far exceeds the value of the house/property
I know he needs advice, he knows it too...he just doesnt know where to get it from, hence my query here.
Even when my relative went through the bankruptcy process, finding any helpful advice was almost impossible but she got through it in the end.
As for the comment about forcing closure to get 5k instead of 50k...that would imply there is some ability to negotiate ? Through non legit lenders, he could raise some money, but 40k is out of the question.
-- Edited by Handyman on Monday 18th of February 2013 10:08:23 PM
It is a sad tale but one of the clients own doing. It is easy to blame HMRC but really this guy was quite happy collecting the cash but now realises he was in the wrong! As Mark says Hindsight is a wonderful thing. If you are going to start your own business you should always speak to someone in the first place and get the right advice then. It sounds to me like this accountant has been appointed on the clients behalf, hence why the advice may not be as forthcoming - that said I am not sure what more to expect?
I suspect bankruptcy will be the only option but as Andrew says HMRC may be willing to set up a payment plan. To be honest I would have thought bankruptcy would be the better option.
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But bankruptcy is not something to be considered lightly.
Basically, HMRC will take everything that they can get and you / your freind would be left unable to hold a bank account, or raise more than £500 in debt or trade as any business under any name or be a director of a limkited company.
Your freinds home along with all other assets can be sold to pay creditors including HMRC.
To my mind if possible one is always better to try and not be made bankrupt by making payment arrangements with HMRC. However, they may take matters out of your freeinds hands and bankrupt them anyway simply to get what they can.
Note that when it comes to bankrupting tax payers HMRC's logic is not always sound and there are cases where they would rather get £5k now by forcing a firesale than £50k later by allowing businesses to continue with a payment plan.
That said, HMRC cannot impose bankruptcy. They must take matters to court and it is down to the court to decide whether or not they will allow such.
I got off point but what I was trying to say is that bankruptcy is not the easier choice even though it may in some select instances be the better of two really bad scenarios.
Your freind needs to seek professional legal assistance immediately.
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.
Handyman wrote:As for the comment about forcing closure to get 5k instead of 50k...that would imply there is some ability to negotiate ? Through non legit lenders, he could raise some money, but 40k is out of the question.
You may have misunderstood that line.
There are businesses out there that could with a bit of help be turned around but there have been cases where HMRC (and banks) have not wanted to risk the loss of a little for a sound business case of getting everything later with interest.
Its an understandable position in that they know that they can get £5k but the £50k is a risk and in giving the taxpayer time they may also risk losing the £5k. But in that scenario if there is a sound business case does it not make more sense to risk the £5k for the greater return?
HMRC has flexibility over the penalties, surcharges and interest which they would be looking to charge but their primary remit is that they are attempting to recover as much of the base amount due as possible.
As for going to lenders for the money. My suggestions over negotiating were negotiating for time to pay rather than loans. Taking further loans espechially at the interest rates likely to be on offer is just digging an even deeper hole.
kind regards,
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.
If he is perminently making a loss at the business year on year, and is mortgaged up to the hilt, then is it just not a viable business in the first place? I appreciate this sounds harsh but good business planning when starting a business is essential to make sure that the money you borrow is feasible. I know sometimes its takes a couple of years for a business to turn a profit.
The only reason I say this is I know someone who was left a family business and because he was so disorganised and the the recession hit us, and because his paperwork is appalling, he remortgaged his house, didn't bother seeking advice from an accountant and eventually went bust. It was a good business and should never have gone bust in the first place. He has IVA's against him and has really struggled, hes now got another business and is rubbish at keeping paperwork still, sometimes people just don't listen.
After all other self-employed people who are good at their job and really good with their paperwork have survived the recession. Sometimes people when they start up a business just don't realise how important it is to keep good records and involve an accountant or a good bookkeeper from the start. Although paying an accountant/bookkeeper is an added overhead that I appreciate some people just can't afford, its worth it in the end so not to get in a pickle and then loose everything.
Also in all of this I note hes a 'sole trader', well considering what turnover hes got, he should have been limited again hindsight is a wonderful thing.
Hopefully a good insolvency practitioner can sort him out and put him on the straight and narrow. I agree with Shaun, loans are not a good idea, they are just digging a deeper hole. Time is the only thing they can ask for regarding paying the debt. If he doesn't go bust I would suggest he finds himself a good bookkeeper to help him each month, and then think about marketing his business to bring in more revenue, as I'm sure he won't want to run at a loss forever, surely if he did its not worth it.
-- Edited by Amanda on Tuesday 19th of February 2013 09:23:21 AM
The losses are largely down to setup, building the garage, making it legal for commercial use etc. That cost him a clean fortune and took over 2 years alone.. Every time it seemed to get cleared up...he had to throw more money at it. The red tape and bureaucracy was unbelievable with local council trying to fight it at every opportunity despite there being no complaints from anyone, and it being in a secluded area. Overheads between electric, insurance, rates etc etc are just ridiculous. In many ways, the worst thing he did was try and make the setup fully legit. Plus a parts supplier he had been using had been robbing him blind as he placed trust in their account and wasnt paying enough attention to it ( and the owner had been a friend of many years ). So many things went wrong really, although most were almost resolved when the investigation then hit.
And he is very good at his job....but in some ways that is partly a less profit operation. An example of one customer, and a friend who doesnt use him anymore. He can get his van "serviced" elsewhere for less than the cost of parts to do the job properly. So clearly whoever he is using now, simply isnt doing the job properly, or anywhere near it. But all the customer sees in those cases is the bottom line, and the word serviced. Actual work carried out almost becomes irrelevant as they dont see it ! Customers in this current climate just want cheap whether that means it's done correctly or not.
Sometimes honest and genuine workmanship is much harder to turn a profit when there are so many cowboys out there. Some of the worst being main dealers.
So the reality is that a good accountant will have him probably owing a lot less than he is currently being chased for as VAT will have been charged but not reclaimed on all of those setup costs and if HMRC want the VAT on sales then the VAT on purchases for the same period is now deductible.
If his accountant can negotiate HMRC down to reasonable levels of interest, penalties and surcharges on the argument that such was neither intentional nor concealed PLUS recalculate everything on the basis that he had been VAT registered then the final figures should not be as bad as they seem now.
A good accountant should cost him no more than £45 to £100 per hour and sorting this out will be time consuming both in terms of negotiating with HMRC and reverse engineering the books to apply the missing VAT.
I would advise that he seeks the assistance of a local chartered practice that is recommended by others in the business community, does not hide anything no matter how foolish he sounds and does whatever they tell him to do.
If at the first meeting the practice does not feel that he can be helped then it's time to go belly up (they will probably advise the use of a good insolvency practicioner).
There is no way of coming out of this well but there are varying degree's a bad and your freinds key concern is to ensure that they do not end up with the worst of the bad options (that's known as a Maximin / best of the worst approach).
On the latter point about the cowboys, tell me about it. There are also a lot in this business as well as the terms accountant and bookkeeper are not a protected in law. But, as with the garage industry, so often clients consider the only the price, not the letters after the accountant / bookkeepers name which reflect years of learning their trade.
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.
If you're going to spam your business Flavia, I would have at least picked a decent thread. The one you're replying to is 5 years old, the guy's probably been bankrupt and through the other side now.
Interesting read though, and given me an idea to go on my new website when I finally get around to doing it. Amanda raised a very valid point about getting a bookkeeper or accountant early, yet far too many businesses consider it an expense they think they can't afford.
-- Edited by Leger on Friday 9th of March 2018 11:36:24 PM
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
I did get up to watch the end of the cricket over in NZ but it had already finished, so came on here instead and totally agree with you that it was a very interesting read and even if the post is 5 years old it still offers some very sound advice to anyone wishing to start their own business
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
As an update the saga is almost over but it was "resolved" by means of an IVA which as noted with the timescales since original posting is almost over.
But it should also be noted...no doubt there should have been an accountant early on, but the accountant that was used to deal with the problem and for a period thereafter it really turned out they were absolutely clueless and caused a lot of trouble too despite being a big name and very expensive.
And even when into the IVA they had no notion of what an IVA was or how it affected tax or anything really in the following years.
Although the company dealing with the IVA were able to offer excellent advice ( advise ? lol )...including moving to a competent accountant.
As an update the saga is almost over but it was "resolved" by means of an IVA which as noted with the timescales since original posting is almost over.
But it should also be noted...no doubt there should have been an accountant early on, but the accountant that was used to deal with the problem and for a period thereafter it really turned out they were absolutely clueless and caused a lot of trouble too despite being a big name and very expensive. And even when into the IVA they had no notion of what an IVA was or how it affected tax or anything really in the following years. Although the company dealing with the IVA were able to offer excellent advice ( advise ? lol )...including moving to a competent accountant.
Hi Stevie
I wasn't on the forum for the original post but great to hear an update after all this time, and glad to hear its nearly over
As you say though just because the accountants had a big name and were very expensive does not mean that they will always provide the best service
Funny to see you still remember the advice/advise nice one
Cheers
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Doug
These are only my opinions of how I see things and therefore should not be taken as advice
Know your audience Flavia! Plus read forum rules. Gawd!!!
He he
I realised I had put you could have found a more decent thread, what I actually meant was a more relevant thread. The thread itself was a good read, and it was good to get an update from Stevie.
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
