About incompetent accountants and a nearly-homeless family: how not to do the accounting for a Limited Company

* names have been changed to protect individuals' privacy.

Jacek* and Marta* came to Scotland with a dream of a better life. He - a professional builder - quickly found a niche in the construction services. After a few years of working for others, he founded his own company. The business was good,customers recommended Jacek to friends, family and beyond.

Jacek is a builder, not an accountant, so he entrusted the accounts of the growing business to a Polish accounting and bookkeeping office in Edinburgh. Every month Jacek delivered his receipts and invoices to the two ladies running the accounting company  in Edinburgh.Let's call them Kasia* and Basia*. Jacek naturally assumed that everything would be submitted and settled correctly, in accordance with the regulations and on time. After all, he hired a proper accountant.

The first red flag was a VAT inspection, which showed that this tax had been incorrectly calculated for over 5 months. I cover this subject in a separate article.

The problem with VAT, however, turned out to be the tip of a huge tax iceberg.It turned out that Kasia and Basia had been doing practically nothing for a year and a half - despite the fact that Marta brought paperwork to their office every month.

Jacek appeared in my office in February. As always in the case of a new customer,I prepared for him the so-called engagement letter - a contract that defined the terms of our business. After signing such a contract, I usually send are quest to the previous accountant to forward my new client’s records. The transfer of documentation is the responsibility of the accounting office. Almost six months later, nothing had arrived from Kasia and Basia. So I worked on the records Jacek gave me: bank statements, bills, notes.  The ladies agreed with Jacek to deal with the payroll until the end of the tax year and submit the self assessment returns for the pair of directors.

In the meantime, Jacek and Marta sold their house to buy another one. They found their dream property, agreed all the terms with the seller. All was left was to wait. The key exchange was set for June.

As is usually the case, buying a new home required a mortgage. This was supposed to be easy. Marta and Jacek had a large deposit, and decent,documented earnings.  Well ... documented!

It turned out that Kasia and Basia had not yet submitted my clients'corporation tax return.

Jacek's request for a quick resolution

- it should not take a lot of time if all the documents are correctly booked - fell on a barren ground, because pretty much nothing was booked and the ladies appeared to be extremely incompetent. I'd known before that they had no idea how to properly deal with VAT, now it turned out that they did not even know what a DLA (Director Loan Account) was - the absolute basics of limited companies’accounting.

The situation of my client's family was unenviable. A few weeks earlier they had to move out of their old home. The new house was waiting, but it turned out that Jacek and Marta may not get their mortgage after all, and the vendor had every right to sell to somebody else. The family's belongings were in storage,some even kept in the company van! Renting a flat for a short period is difficult and expensive, so they stayed at friends’ place in their absence, but the friends were about to return to their flat and Jacek and Marta's family was about to become homeless. What is to be done? Rent a flat, or still hope to get that mortgage? Jacek and Marta faced a realistic prospect of homelessness,couldn't complete the purchase that had been agreed in principle for months,and their whole life was descending into chaos.

I wanted to do everything possible to fix this situation. I promised the mortgage adviser that I would provide all required documents within two week sand asked the bank to wait with making their decision.

Three people from the TaxOne team worked 10+ hours a day, seven days a week, to do the job for which Kasia and Basia had 18 months. Eleven days of such efforts resulted in a success: we prepared our clients' company's Final Accounts, which were submitted to Companies House and the bank. We breathed a sigh of relief and satisfaction from a job well done, thinking that the worst was behind us and that Jacek and Marta would soon be able to move into their new home. Too early!

Few days later it turned out that the company's accounts do not match the self-assessment of the directors, submitted by the "accountants" at the end of the tax year. A mortgage adviser, a man not given 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 my best to untangle the sorry mess. The incompetence of the "accountants" did not only concern VAT and negligence in day to day bookkeeping. The list of errors began to resemble a litany.

It also turned out that the payroll was done wrong, the amounts on the directors' payslips were incorrect, and the "accountants" did not know how to correct those, so they decided to simply include the surplus as dividends. And this is how in Marta and Jacek's self-assessment Kasia (or was it Basia?) reported dividends amounting to nearly 20 thousand pounds.

How did that happen? After all, dividends cannot be paid before the final settlement and the payment of the Corporation Tax! The company, although it did well, did not make enough after-tax profit to pay such high dividends. Of course, Kasia and Basia would have known this had they done the company accounts correctly. In this case, after all payroll payments, running costs and tax, the net profit was negligible - while Kasia (or was it Basia?) completed the settlements as if tens of thousands were available for dividends.

I put everything that was not super-urgent on the back burner and spent the next week fixing the mistakes of these "accountants".

Incorrectly done payroll can in some cases be corrected using a so-called EYU -earlier year update. As an authorized HMRC agent, I contacted them and presented my client's problem. The first conversation, despite a long discussion with a senior official, did not bring the expected results: I did not get the permission to submit an EYU. I was told that we could not just decide that certain amounts should willy-nilly retroactively accounted for as directors' pay. However, I did not give easily, and after many hours of reviewing the applicable financial regulations, I returned to HMRC and presented my arguments, citing the relevant legislation (Financial Acts) and stated that if they did not accept my justification, I would be happy to present it to the relevant Tribunal. It helped! I was able to correct the payroll .After all that, self-assessment returns had to be corrected too. In the whole undertaking, it was the easiest task, since by then I knew the financial situation of both the company and the directors like the back of my hand.

Only then could I prepare all the paperwork for the bank so that it could grant my clients the mortgage. A document of over 60 pages long was created, each of them signed with my name and certified.

And finally, a few weeks after the first alarm from the mortgage adviser, I received the following 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, this is not the end of my clients' problems, because we still have to deal with all the tax short comings, but at least they will have a roof over their heads!

At some point, simply because I am a human being, not just a tax adviser, this matter took on a personal dimension for me. That's why I am very happy that I could help someone in such a complicated situation. Of course, none of this should have happened at all.