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Replies to Queries - 2 - Half of the picture

20 February 2002
Issue: 3845 / Categories:

We took on a new client about four years ago to prepare accounts for what was then his new business. Each year the accounts have shown a healthy level of profit and they have been agreed by him. We were not instructed to handle any tax affairs on his behalf until very recently when he requested that we submit only the accounts for the year ending 31 December 2000 along with a 2000-01 tax return form.

We took on a new client about four years ago to prepare accounts for what was then his new business. Each year the accounts have shown a healthy level of profit and they have been agreed by him. We were not instructed to handle any tax affairs on his behalf until very recently when he requested that we submit only the accounts for the year ending 31 December 2000 along with a 2000-01 tax return form.

The client says that he has not previously had any agent acting for him in relation to his tax affairs and, although we have requested a copy of the return submitted for 1999-00, he has not provided this and claims that we are not instructed in relation to the tax position for earlier years.

Our suspicion is that no returns have been prepared for those earlier years and no tax paid.

It seems unlikely to us that the client can hope to escape Revenue enquiry about past years, but our concern is whether we should go along with his request to handle only the 2000-01 return without taking any action in relation to earlier years. Obviously we cannot prevent a client taking risks with his own tax affairs, if that is his choice, but we are concerned about our own position as a firm. Readers' views and advice would be welcomed.

(Query T15,957) - Whistleblower.


Practising taxation is not just a question of interpreting the law and accepting the information provided by clients. A pragmatic approach is necessary and it is prudent to assess the likely credibility of information supplied by clients with reasonable care. 'Whistleblower' must, of course, ensure that he acts in good faith with the tax authorities; however, difficulties arise when the submission of accurate current information does not constitute the disclosure of all relevant facts. This may be partly due to the client's naiveté if he has not previously completed tax returns for his business.

In this instance the client is behaving in a manner likely to attract the attention of the Inland Revenue. He should be made aware of this. If 'Whistleblower' has acted for this individual for four years, it is surprising that he does not know if these accounts have been used to support a self-assessment tax return. The absence of any payments of income tax through the business should have been queried - it is unusual for the tax liability to be wholly funded from resources outside the business. One would have thought that 'Whistleblower' would have at least discussed this point when clearing the accounts, particularly in respect of the later years when the liability would have become payable. Also, have National Insurance contributions been paid? Have the VAT returns been submitted on time? These are strong indications of compliance with statutory requirements.

A self-assessment tax return has been issued and 'Whistleblower' should inspect this to see if it includes the usual self employed pages. If so, then it would indicate that they have been completed previously. If they are not attached, then it is unlikely they have previously been submitted and, prima facie, the income from the business has not been declared.

A frank discussion is necessary with the client. He/she should be advised that when form 64-8 is lodged with the Inland Revenue, this authority will relate to past years as well as future years and it will be necessary to obtain a copy of his tax return from the Revenue for 1999-2000, as well as his statement of account. The position should be confirmed in writing to the client to avoid misunderstandings. Hopefully, such an approach will persuade the client to realise that if there is anything wrong with his tax affairs, then it would be better to come clean with his accountant now and authorise full disclosure, rather than waiting for the Inland Revenue to launch an investigation. Such an investigation is inevitable if no previous figures have been submitted - because the dates of trading on the 2000-01 tax return will show a continuing business, not the commencement of a trade. 'Whistleblower' should also request a copy of the previous capital allowances computation.

If the client still continues to refuse to disclose details of his tax affairs prior to 2000-01, then 'Whistleblower' should resign because any professional relationship depends on trust and this will have evaporated. 'Whistleblower' did not act for the client in respect of the earlier years so he would only have to inform the Revenue of his resignation. - Mike.


The query gives the impression that the Inland Revenue has issued a tax return form for 2001. If this is correct, at least the client is not a 'ghost' in the eyes of the Revenue, and has a Revenue file and reference number. If this is not correct, the position is perhaps more serious, as outlined by 'Whistleblower'.

One, slightly devious, way of accessing the 1999-2000 return would be to ask the client to sign a form 64-8, and then request the Revenue to provide the firm with a copy of the 2000 return. This could, of course, backfire!

In the end the firm's decision must be based on acceptance or non-acceptance of risk, and the terms of the original engagement letter, which I trust that the client has signed. Factors that need to be addressed are:

* Are you prepared to prepare and submit tax returns for (say) six years prior to 2001?

* Are you prepared to deal with self-assessment enquiries into the years 1996-97 to 2000-01, and possibly old style tax investigations into 1995-96 and even earlier years?

* Do you consider that the client will instruct you to complete any additional work and pay your fees promptly? Enquiry and investigation work necessitates either a payment on account in advance or monthly billing.

* How important is the client to the practice?

As a follow up to the existing engagement letter, perhaps a letter should be sent to the client, outlining the fact that submission of the 2001 tax return by you may lead to enquiries and additional work for previous tax years. Ask the client to confirm in writing that he understands this, perhaps by signing an additional copy of your letter to him and returning it to you.

You can do no more - unless you decide to cease acting for the client at this juncture, and inform him, accordingly. By the time this reply is published, advice given in this reply will be too late, unless you and/or the client have been prepared to risk the £100 late filing penalty. - Magnus.


Extract from reply received by 'Hodgy':

Thankfully self assessment does give 'Whistleblower' an opportunity to test the truth, or otherwise, of his concerns. He can ask his client for details of the 2000-01 payments on account already made on 31 January 2001 and 31 July 2001 and if a claim was made to reduce the payments on account. The payments on account are based on the 1999-2000 tax liability. If the client's affairs are not complex, that liability will be based on the accounts prepared by 'Whistleblower' and so he should be able to tell if the payments are in line with his expectations. If the payments on account seem too low or if no payments on account have been made, 'Whistleblower' has an ethical problem.

I would refer 'Whistleblower' first of all to paragraph 3 of the guidance on Professional Conduct in Relation to Defaults or Unlawful Acts in section 1.306 of the 2001 Members Handbook issued by the Institute of Chartered Accountants in England and Wales. If he is a member of a different professional body, he should refer to that body's guidance. The guidance from the ICAEW clearly states that to be able to act for a client, the client must make full disclosure of all information relevant to the work in question. If such disclosure is not made, 'Whistleblower' should no longer act for the client.

The next problem could come if the client provides the information that has been requested and this demonstrates that the 2000 tax return submitted to the Inland Revenue is not in line with the accounts prepared by 'Whistleblower'. In this event, 'Whistleblower' should refer to the guidance at paragraph 4 of Professional Conduct in Relation to Taxation in section 1.308 of the 2001 ICAEW Members Handbook. Disclosure of the irregularity should be encouraged and the client should be made aware of the consequences of a subsequent discovery of the irregularity by the Inland Revenue. It is made clear that disclosure is the responsibility of the client, but that if the client refuses to disclose, the accountant should not act for that person in relation to tax matters. The guidance also suggests that the breakdown of trust with the client may be such that the accountant can no longer act for the client in any capacity.

Issue: 3845 / Categories:
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