We recently had a visit from a company director who was out of his depth.  The company had been formed (and effectively run) by his father, who had produced accounts.  Unfortunately they had not been filed with Companies House (nor had the annual return), and were 10 months late, attracting a penalty of £1,500.  There was a proposal to strike off, which was suspended, I would guess at the request of HMRC whilst they tried to get any tax which was due.

The accounts showed that the company had broken even for the last 2 years.  A good effort had been made at preparing accounts in line with Financial Reporting Standards, although they fell short, mostly through the notes not matching up with anything, and making other simple errors such as not including any share capital, and including depreciation even when there were no fixed assets.

There were other issues which the director was not too sure about such as whether a PAYE scheme was run, and how their main ‘employee’ (the director’s brother) was handled – originally thought of as self employed, although the amount paid to him strangely worked out as 52 weeks at the same amount (i.e. 52 x £250 = £13,000).

The situation was now desperately bad.  HMRC had visited the business and given them 5 days to complete the company tax return, otherwise they would take the assets which they had listed (which were not down as assets on the balance sheet), effectively stopping the business from trading.  They had assessed that the business owed £8,000 in corporation tax.

During our meeting, we felt that we were providing solutions to their problems, to the huge hole they found themselves in.  We felt able to help the business alongside our existing workload, the business would pay a much smaller amount of corporation tax (I would estimate less than £2,000), they would get HMRC and Companies House off their back, and would be able to concentrate on their business.  The director seemed happy that this was exactly what he wanted.  However, towards the end of the meeting, I mentioned that as this was a new client with an urgent job, we would require a down payment.  We never saw the director again.

We have had businesses approach us before who have got themselves into all kinds of sticky situations by not being aware of their obligations, not planning for taxes, not filing their returns and doing other silly things such as putting their car through a company, but not accounting for the resulting benefit in kind.  The thing that struck me about this case was the belief that the directors could handle everything, that these were not difficult things to deal with, and yet was now struggling to the point where it was being a bigger distraction to the business and even threatened its very existence.

Now the dilemma I faced when putting this article together was the angle to take.  There were several possible stances I could have taken such as:

• Directors have responsibilities and should make sure they are met.  Last year, we had a limited company director come to us, his company had been wound up by Companies House because he hadn’t filed anything and he didn’t even realise.
• The increased risk of facing a HMRC investigation.  Over the years, we have seen tax returns completed for sole traders, partnerships and limited companies that contain significant errors in what can and cannot be claimed for tax purposes.  From HMRC’s perspective, there must surely be easy tax to be collected from these unrepresented businesses.

But I have (not unsurprisingly) decided to highlight the price of not getting professional advice.  To paraphrase Red Adair, “if you think the cost of a professional is high, try the cost of an amateur”.  I wouldn’t dream of trying to service my car.  I’m not stupid, and sure I could do it if I really wanted to, but would obviously have to get a book and some tools to do so.  I would then spend a long amount of time doing it, with the ultimate risk that if I mess it up, I will have to pay someone to put it right.  Why do some businesses take such a cavalier approach to their accounts?

• If a business comes to us on day 1, we can give them advice on a range of issues, even including the most suitable business trading style.
• If they come to us before the year end, we may be able to advice them on actions they can take to reduce their tax bill.
• If they come after the year end, they’ve lost that planning opportunity, but we can still make sure they comply with their obligations (and plan going forward).
• If they come to us like the business in the case study above, it’s damage limitation time.

I’ve mentioned this case study to a couple of other businesses, and the attitude is the same as mine; how do they sleep at night?  It seems such a hard way of learning how limited companies work.