How can someone get out of this mess?

john01269

Hi,
this is not me, it's a friend of mine.
Once apon a time my friend wanted to work for himself so became self employed when he was very young, say 18, he is now in his late 20's. He had got finance on some costly machinery so that he could run his self employed business, he had some issues and the business finances became to much that he struggled to pay them several months after being in business, the machinery got repossessed as he could not pay, but he had already claimed the VAT back on them items. He did not want to go bankrupt and therefore to this day he is still paying some of them debts that he still has with payment plans. The only way he could move forward was to get a job, the only job he could get at the time was a courier delivery job, he didn't have a car so had to get a loan to purchase the car, he claimed the vat back on it as it was a car used for work as he worked full time delivering. The courier work after 2 years became not as good paying and he decided to start a limited company and get funding for it, the limit company is only about 7 months old but is going pretty good and is looking to become a good paying and company where he knows if he keeps going the way he is, he can get rid of his debts once and for all which is what he wants as they have just caused him a lot of stress and heartache and is not good for mental health.

Well then HMRC contacted him wanting to do an audit on all his personal self employment, they have told him that the he should have paid the vat back on the repossessed stuff and also should have not claimed vat on the vehicle even though it's used for work. So he said they have used the month he claimed vat back on the car and got an error rate of 50 something percent, meaning that they have used that month to place an error rate on every other month of his self employed business. So using the 50% error rate, they worked out he now owes them nearly £30k, they have then told him they are charging around 70% penalty onto it making it closer to £45k and then adding interest on it aswell, so it's looking closer to the £60k mark now and he knows he can't pay this anytime soon, he would be able to pay it over say 10 yrs, but would never be able to pay that all at once or even in 12 months as it's way to much. They have also decided to audit his company aswell now, so hitting him hard again, it starting to look like they finding fault with anything they can, I even seen one or 2 statements where the person in hmrc says the invoice is invalid for the company and it looks legit to me and I know he has used the itme and brought the item for the company, it looks like they are hitting him hard and a bit harassing. It's getting him really down and upset and pushing him into depression as no matter how much effort he is trying to resolve his debt from his failed business when he was young, it keeps coming back to bite him. He wants to keep running the limited company as he knows it will do well and he has spent so much money and put so much effort into it and it is looking like it has a good solid future, even I can see that this time, but couldn't see it on his other business, he believes he will not be able to get a job and even if he did, he would not really have a car as that would probably get taken off him anyway, so would not be able to get to work then as he lives in the sticks, does anybody know his options because his limited company is his wages, his source of income, the only way he will eventually be able to become debt free and pay HMRC, etc?

Thanks

tacpot12

He needs support from a good accountant but a accountant will worry about whether they can be paid. He might get some free advice, some accountants can be pretty generous if their business is doing ok. Might you be able to pay the accountant? 
 
He will be able to become debt free, but he needs to convince HMRC that he is doing all the right things, and then pay them what he owes. The accountant will be able to establish what he has done wrong and where HMRC are trying it on. If he has done the wrong thing, we will need to pay what he owes. 

fatbelly

I agree he needs professional help.

Business Debtline would be a good place to start

He may be earning too much to get help from https://taxaid.org.uk/ but it's worth a try

Coffeekup

Once upon a time....

john01269

tacpot12 said:

He needs support from a good accountant but a accountant will worry about whether they can be paid. He might get some free advice, some accountants can be pretty generous if their business is doing ok. Might you be able to pay the accountant? 
 
He will be able to become debt free, but he needs to convince HMRC that he is doing all the right things, and then pay them what he owes. The accountant will be able to establish what he has done wrong and where HMRC are trying it on. If he has done the wrong thing, we will need to pay what he owes. 

He does not have the money to pay the accountant, he is only just about back on his feet, he worked out he can pay about £500 a month max, but that would take years to pay and HMRC normall only allows 12 months if your lucky I have read. He can only earn this if he can keep running his ltd company other wise he would not have a job or an income if they put him into bankruptcy and he lost his ltd company.

Emmia

I think he can't afford not to have an accountant, given the various problems he's got with HMRC and his history. 

john01269

Sorry I mean he does not have the money to pay HMRC all in one go I mean not the accountant

MovingForwards

He needs a good accountant. The accountant will go through everything, produce proper accounts and could knock back a good portion of what HMRC are trying to recover. 

tacpot12

MovingForwards said:

He needs a good accountant. The accountant will go through everything, produce proper accounts and could knock back a good portion of what HMRC are trying to recover. 

It is not unusual for accountants to save clients an amount that is in excess of what they have charged as fees.
Accountants are often better at negotiating with HMRC that the clients; I think in part it is because they can be dispassionate about the business. If the accountant can show that the client has a viable business that can pay the back tax that is owed, HMRC probably have a duty to accept a repayment plan that has a good chance of success.   

WhoME

It sounds like the machine would have been under the capital goods scheme so vat should have been repaid when it was disposed of. Did he sell it on, was there vat charged on the sale? 

You can never reclaim vat on the purchase of a car (you can reclaim vat on a lease but only on 50%).
Unfortunately, HMRC will open enquiries into everything if they find mistakes.
It sounds like, if they are charging a penalty of 70% they are classifying it as either deliberate prompted or deliberate, concealed and prompted (which is potentially quite harsh). Without having the full facts it does sound like HMRC are right in the errors (they usually are) and at this stage the best thing he can do is to appeal the category of the error and get it classed as lack of reasonable care as this has a max penalty of 30%.

You will need to demonstrate that it wasn’t deliberate, there are definitions of what classes as deliberate and what is lack of care etc in the guidance notes on the HMRC website. He also can potentially get penalty reduced by telling, helping, giving (again look at the guidance).

He can apply for a time to pay plan for the tax, this won’t reduce what is owed but they will take the payments over a number of years and at the moment HMRC are more open to agreeing to these. 

I would look at getting advice from an insolvency practitioner though as depending on his assets he may be best with an IVA (he can still keep the business and be a director). Don’t use a dodgy IP from the internet, look at a bigger well known firm (Begbies, Quantuma, Leonard Curtis, FRP etc) that can deal with the complications of the business and the tax enquiry. All these firms will do an initial free consultation. 

Hope this helps (I don’t usually post but thought I would try to offer advise - I’m a chartered tax advisor but spent 10 years doing insolvency work).  Your friend isn’t alone, it is a lot more common than you would think and unfortunately demonstrates the need for an accountant at the beginning because if they get it wrong you can claim on their PI! 

He may also find he gets a lot more enquires in the future now HMRC know about the errors in his records.