How I saved a company, or about incompetent accountants
Jacek and Marta came to Scotland with a dream of a better life. He, an excellent tradesman, quickly found a niche in the construction services market. After a few years of working for others, he started his own company. The business thrived, with clients recommending him to friends, family, and others.
The Accounting Firm Problem - Be Careful Who You Hire for Your Bookkeeping
Jacek is a builder, not an accountant, so he entrusted the accounting of his growing company to a Polish firm in Edinburgh. Every month, the company provided Kasia and Ala, two ladies in Edinburgh running an accounting firm, with receipts and invoices, and naturally, Jacek assumed that everything would be accounted for properly, according to regulations and on time.
The first warning sign that something was wrong appeared in the form of a VAT inspection, which revealed that this tax had been incorrectly calculated for over 5 months. I write about this in a separate article.
The VAT problem, however, turned out to be the tip of a substantial tax iceberg. It became clear that the accountants, Kasia and Ala, had done almost nothing for a year and a half! Despite Marta bringing the company's documents to the office every month, they were not being processed in any way.
Jacek came to my office in February. As always with a new client, I prepared for him a so-called engagement letter – an agreement outlining the terms of our cooperation. After signing such an agreement, I usually send a request to the previous accountant to transfer my new client's documentation.
The transfer of documentation is the responsibility of the accounting firm. Almost half a year passed, and nothing came from Kasia and Ala... So I worked with the documentation Jacek provided me: bank statements, receipts, notes. The ladies agreed with the company that they would handle payroll until the end of the tax year and prepare the self assessment for the two directors.
In the meantime, Jacek and Marta sold their house to buy another. They found their dream property, finalized everything with the seller. All that remained was to wait. The key exchange was set for June.
As is usually the case, buying a new house involved applying for a mortgage. There should have been no problem with it. Marta and Jacek had a large down payment and decent, documented earnings. And that's the key... documented!
It turned out that Kasia and Ala had not yet filed my clients' Corporation Tax return.
Accountants' Incompetence Causes Serious Problems for LTD Company Owners
The settlement shouldn't take long if all documents are properly accounted for, however, the request for a quick settlement fell on deaf ears, because virtually nothing had been accounted for. Both ladies were very incompetent. I already knew that they had no idea how to correctly account for VAT. It turned out they didn't even know what a DLA (Director Loan Account) was – the absolute basics of LTD company accounting.
My client's family's situation was unenviable. A few weeks earlier, they had to move out of their old house. The new house was waiting, but it turned out that Jacek and Marta might not get the loan quickly. While waiting, the homeowner could sell it to someone else. The family's belongings were in storage, and some were even in the company van.
Renting an apartment for a short period is difficult and expensive, so my clients were staying with friends while they were away. However, their friends were returning soon, and the apartment had to be vacated by then. What next? Should they rent an apartment for a longer term, or keep hoping to secure a loan? Jacek and Marta not only had nowhere to live, but all their plans were now up in the air. It was true chaos for the entire family.
I decided to do everything possible to salvage the situation. I promised the mortgage advisor that I would provide all the required documents within two weeks and asked the bank to hold off on their decision.
A year and a half of accounting in two weeks
Three members of the TaxOne team worked over a dozen hours a day without breaks to complete work that Ms. Kasia and Ms. Ala had a year and a half to do. Eleven days of such effort resulted in success: we prepared our clients' company's Final Accounts, which were submitted to Companies House and the bank. We breathed a sigh of relief, satisfied with a job well done, thinking the worst was behind us and that Jacek and Marta would soon be able to move into their new home. Too soon!
Just a few days later, it turned out that the company's accounts didn't match Jacek and Marta's self-assessment as directors, which had been prepared by the "accountants" at the end of the tax year. The mortgage agent (mortgage advisor), a man not prone to verbal exaggeration, used the word "nightmare" at least twice when referring to my client's case.
Once again, I had to dive into that nightmare and do whatever I could to untangle the situation. The incompetence of the "accountants" wasn't limited to VAT and neglected current accounting. The list of errors began to resemble a litany.
It also turned out that the payroll was done incorrectly, the amounts on the directors' pay slips (payslips) were incorrect, and the "accountants" couldn't correct them, so they simply decided to account for the surpluses as dividends. And that's how, in Marta and Jacek's self-assessment, Ms. Kasia (or perhaps it was Ms. Ala?) reported dividends amounting to tens of thousands of pounds.
How is that possible? Dividends cannot be paid out before the company's final accounts are settled and Corporate Tax is paid! Although the company was doing well in the market, it hadn't made enough profit to pay out such a high amount in dividends. The "accountants" would have known this if they had prepared the company's accounts correctly. In this case, after all payroll payments, operating costs, and tax, the net profit was negligible – the amateur accounting firm had processed the company's accounts as if it had tens of thousands available for dividends.
Putting aside everything that wasn't super-urgent, I spent another week correcting the "accountants'" errors.
An incorrectly prepared payroll can, in some cases, be corrected using an EYU – earlier year update. As an authorized HMRC agent, I contacted the tax office, presenting the client's problem. The first conversation, despite a long discussion with a senior official, did not yield the desired results: I did not get approval to make an EYU. I was told that we couldn't simply decide that certain amounts should be retroactively recorded as directors' salaries.
However, I didn't give up. After many hours of poring over financial law, I returned to HMRC and presented my arguments, citing the relevant legislation (Financial Acts) and stated that if they didn't accept my justification, I would gladly present it before the appropriate tribunal. It worked! I managed to correct the payroll calculations.
After all that, the self-assessment calculations still needed to be corrected. In the grand scheme of the entire undertaking, this was the easiest task, as I already knew the financial situation of both the company and the directors inside out.
Only then could I prepare the documentation for the bank in such a way that they would ultimately decide to grant my clients a mortgage. The resulting document was over 60 pages long, each signed and certified by me. And finally, a few weeks after the initial contact from the mortgage advisor, I received this message from him:
“Just a wee update Dawid, the bank has approved the case for Jacek and Marta and will go to full mortgage offer. Good job well done by you.”
Of course, that wasn't the end of my clients' problems, because we still have to contend with tax deficiencies, but at least they'll have a roof over their heads!
At some point, simply because I'm human and not just a tax advisor, this case became personal for me. I'm very glad, therefore, that I was able to help someone in such a complicated situation. Of course, such a situation should never have arisen in the first place. On how to assess whether your accountant knows their job and diligently performs their duties – in the next article.
