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TV specialist facing criminal inquiry

08 October 2010
Categories: News , Christopher Lunn , CIOT , ICAEW , John Cassidy , John Whiting , PKF , Admin
Clients' returns 'may not be correct for a number of reasons'

A firm of accountants specialising in clients within the TV industry is the subject of a rare criminal investigation by the taxman.

The department has written to the clients of Christopher Lunn & Company of Crowborough, East Sussex, stating that, from information obtained so far, ‘tax returns submitted to HMRC may not be correct for a number of reasons’.

Clients have been given until 30 November to make a full disclosure, after which irregularities discovered ‘will be dealt with either by criminal or civil procedures… depending on the nature of those irregularities.’

A spokesperson from Bell Pottinger, which is handling media enquiries for the accountancy firm, said the owners and staff first became aware of the investigation on 22 June, when representatives of HMRC paid a visit unannounced.

Since then, Christopher Lunn & Co. has been co-operating with the taxman’s investigation and is sure of being exonerated in the fullness of time, but the firm has yet to be informed of any specific allegations against it.

The investigation is ongoing. The accountancy firm is aware clients have been contacted by post but does not know whether that means all clients or only some.

Asked whether any practices in dealing with clients could have triggered the investigation, a spokesperson said Christopher Lunn & Co. had been in business for 40 years and had more than 7,000 clients; it had never before had issues with the Revenue that could lead to concern about its practices.

The firm is not a member of any professional body. The owner, Christopher Lunn, is a former member of the ICAEW, having resigned from the organisation. Some staff members hold accountancy or tax qualifications at various levels. The firm does have professional indemnity cover, the spokesperson said.

Clients are not insured with a third party insurer against investigations. Instead, the firm operates an enquiry fund into which clients pay an optional premium to be covered against the cost of investigations. The fund will not be used to cover the investigation into Christopher Lunn & Co. (which is being legally represented by McGrigors solicitors), but it could be called on to cover the cost of enquiries into clients which result from the main investigation.

The fund will only pay for work carried out by Christopher Lunn & Co. Unusually for a business of its size, it has a separate team of five employees who appear to handle only HMRC investigations into the firm’s clients. They are pictured on the firm’s website in combat fatigues and body armour, carrying paintball guns: a joke that was seen as unwise by some advisers to whom Taxation spoke.

The areas of concern listed by the Revenue in their letter to clients dated 17 September fall into two broad categories. The first was a list of areas in which excessive claims for expenditure may have been made, and it included headings most advisers will recognise, such as travel and subsistence, and use of home as office.

On the latter, Christopher Lunn & Co. had informed clients that they used a figure of ‘up to’ £520 a year. HMRC more recently said that, while they will accept a figure of up to about £3 per week as an estimate, claims for more than this should be based on a proper calculation of the expenses (rent/mortgage interest, heat and light, etc) apportioned for time and area.

Christopher Lunn & Co. optimistically suggested this may mean clients could claim more than was included in their accounts and get a repayment. In practice it is rare, though not unknown, for investigations to end with repayments, and only those whose full-time work is carried out mainly in their home can normally claim significant amounts as expenses.

The Revenue’s letter also listed accountancy fees as an area of concern, and Christopher Lunn & Co. acknowledged in a letter to clients on their website that this may have been over-claimed. The firm says it includes a standard provision in the accounts, and that if less help was required on bookkeeping this may have overstated the expense.

While an over-provision might be made by an accountant in one year’s figures, this would normally be corrected automatically in the following year.

Taxation approached investigation specialists and asked how they would advise clients who received letters such as the ones sent to Christopher Lunn & Co.’s clients. Their comments should not be taken as professional advice, since that could only be given on a personal basis in full knowledge of the facts, nor should they be taken as accepting the truth of the allegations made by HMRC.

John Cassidy, a tax investigations partner at the London office of accountants PKF, did not think the criminal investigation was likely to have been triggered by over-claims such as the ones detailed above, which would normally have been dealt with by investigations into clients’ returns.

He believed it was more likely to have resulted from HMRC’s belief that clients were ‘routinely, and apparently falsely, claiming self-employment status by directors’, which was part of the second set of areas listed in the taxman’s letter. This included allegations of retrospective creation or apportionment of income and expenses into a limited company.

According to its website, Christopher Lunn & Co. will typically advise clients to have a self-employed trade running alongside a limited company when they are ‘not just performing the duties of a company director but also carrying out some or all of the tasks for which the company gains its revenue’, and that work is of a creative nature.

John Cassidy and another investigations specialist consulted by Taxation felt this arrangement could sometimes be justified but was disliked by the Revenue, and that it was particularly hard to justify if the only receipts in the self-employed trade came from the client’s own company.

Mr Cassidy was concerned that a checklist made available to clients on the firm’s website, showing what to bring to an accounts preparation meeting, said that for income and expenditure, ‘we would like to see totals. The meeting will certainly not work if we need to go through your receipts for time you have booked.’

This could lead to clients thinking the accounts were fine because they had been prepared by an accountant, when insufficient work had been done for tax purposes, said Mr Cassidy, adding that there should at least have been a discussion advising the clients that they must have absolute faith in the totals they provided.

Asked what clients of the firm who have received a letter should do now, John Whiting, tax policy director at the Chartered Institute of Taxation, said, ‘If people get this sort of letter from HMRC then they need to get professional advice and support – and they need to decide whether their existing adviser is in the best position to help.

‘That may well point them towards getting a second opinion, although they will no doubt be influenced by what their current adviser is saying. But, above all, they need to take this sort of letter seriously.’

Both John Cassidy and other investigations specialists agreed that taxman’s written offer to clients of Christopher Lunn & Co. was positive given that it appears there will be little or no penalty to pay in addition to the tax and interest the Revenue will inevitably collect, provided an offer to come forward prior to 30 November is taken up.

If HMRC use their full civil powers in cases in which the taxpayer has not co-operated, penalties can be up to 100% of the unpaid tax. Christopher Lunn & Co. has advised its clients to give all possible assistance to the department, although it remains unaware of any way clients can do so, since the firm has not been told of the specific allegations against it. 

Clients should therefore double-check their records, accounts and tax return, said John Cassidy. If errors on Christopher Lunn & Co.’s part were shown to have taken place, there might be a claim against the firm for professional negligence, so it might be appropriate to carry out the checks for free.

‘I would have thought that the client will get more comfort from a third party doing this work and HMRC will pay more attention to that third party's findings,’ remarked Mr Cassidy.

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