When clients don’t tell you everything…

When it comes to tax liability, some clients can get slippery… They may think What can I get away with? and try to hide things. But this can land them, and you, in a whole lot of trouble.

“Others think they’re completely above the law and set out to test every aspect of it, but there are also those who are simply ignorant – they hide legitimate expenses because they don’t know they can claim tax relief,” says Andrew Graham, partner at Graham & Co Accountants.

He adds: “On the whole, I believe that even the most honest person may be subject to temptation in extreme circumstances and depending on the size, colour and timing of the carrot.”

Do you suspect a client is holding something back? If so, it’s best to act on your suspicion because that ‘something’ could be serious, with the potential to cause major problems.

Information clients may hide

Paula Travers, owner at Travers Accounting Services, points out some of the typical cases:

• Income – either withholding a particular income stream or under-recording the income coming in, particularly if they operate a cash business.
• ‘Wages’ – paying unregistered ’employees’ from company funds. Again, this is more prevalent in cash businesses, and one facilitates the other – unrecorded cash income is used to pay an unregistered ‘employee’. Also, clients may be topping up a registered employee’s wages by only recording a portion of their wages officially, and paying the unofficial part in cash.
• Personal expenses – disguising personal expenses as business expenses, such as booking a personal trip near a client location and claiming it was a business trip.

Of course, the big one is money laundering. “As a matter of principle we never list cash businesses as low risk in our Money Laundering investigations,” says Graham.

The National Risk Assessment of money laundering actually identified cash-based money laundering as one of the greatest areas of risk in the UK.

Read more on anti-money laundering and AAT’s role in combatting it.

Key takeaway: Be on your guard if the client runs a cash business.

What are the red flags?

Alarm bells should start ringing if the client is evasive or reluctant to provide detailed and consistent information about their business.

“There could be a reluctance to disclose the identity of all beneficial owners, or to provide information, data or documents required to provide the service,” says Helen Barrett, Professional Standards Manager at AAT.

She adds: “This could be either at the start of the engagement or it could be a change in the behaviour of an existing client. While it’s important that you get to know the client and carry out initial due diligence and verification checks, you need to keep monitoring for red flags and suspicious activity on a regular basis.”

It may seem counter-intuitive to building a healthy relationship with your client, but the onus is on you to look out for potential signs of money-laundering. It’s more likely you’ll end up protecting the client from themselves in their attempts to avoid taxes, or simple lack of knowledge.

Graham says he gets suspicious when clients fail to answer simple questions quickly, and when he sees alterations in records.

Alongside this, Travers adds that people often give themselves away in the language they use. “For example, any reference to ‘through the books’ tells me all I need to know.”

Key takeaway: The red flags and suspicious activity are often missed or ignored because of complacency, a lack of scrutiny, and a fear of damaging relationships.

What to do when a client hides something

Graham warns the offending clients, verbally and in writing, that withholding information could lead to sub-prime or incorrect advice being given, and to penalties.

“Also, we give them at least two chances to come clean. Sometimes there are extenuating circumstances and they may need further professional help. Some people are dishonest or withhold information because of family illness, relationship breakdown or gambling problems. Very few clients would come straight out with it and say ‘I’m desperate and trying to help my son clear £20K on his Paddy Power account’, for example.” 

Travers advises clients what corrective action they should take. “If they’re unwilling to accept and act on this advice, I end our working relationship. I’m not prepared to risk my hard won letters for anyone.”

Elaine Clark, Managing Director at online accountancy firm CheapAccounting.co.uk, admits it’s often tricky to separate out those clients who are in a muddle and just need help sorting things out, from those who are just out to gain some sort of illegal tax advantage.

“When questioning and probing them, you need to tread a fine line between remaining neutral and non-confrontational, and following the code of professional ethics.”

She adds: “Depending on what I suspect, I ask some more questions without highlighting what it is that I suspect, to avoid the ‘tipping off’ trap. If after this further research I don’t feel comfortable, I disengage (my career is much more important than someone who wants to bend tax rules) and potentially file a Suspicious Activity Report (SAR).”

It’s an offence to “tip off” a client when you’ve reported them for a SAR. And if you disengage, make sure to send a Letter of Disengagement and do not allude to any suspicions in your reasons for ending the relationship. This can be classed as ‘tipping off’.

Key takeaway: If in doubt, consult with your professional body and, if required, make a disclosure to HMRC and/or other relevant authorities.

When to file a SAR report

Accountancy service providers have a legal obligation to identify money laundering red flags and report any suspicions.

“If at any time you know, suspect or have reasonable grounds for knowing or suspecting that a client is engaged in, or attempting, money laundering or terrorist financing you must submit a SAR to the National Crime Agency as soon as it’s practicable,” says Barrett of AAT.

AAT advises you ask yourself the following:

1. Do I have knowledge of money laundering activity taking place?
2. Do I have a suspicion money laundering activity is taking place based on circumstances and information, but without certainty or proof?
3. Do I have reasonable grounds for knowledge or suspicion, where the facts or circumstances, if viewed objectively, suggest that the likelihood of my client engaging in money laundering or terrorist financing is reasonably high?

Key takeaway: Not acting on suspicions and failing to submit a SAR once you have reasonable grounds to do so is a criminal offence.

In summary

Clark of cheapaccountingco.uk draws a firm line when her suspicions are raised. “The client/accountant relationship is one of trust. If they withhold information, then I may not be the right accountant for them. The same applies if they choose to ignore the advice I offer.”

If you suspect a client is hiding information from you, and maybe feel a bit out of your depth, the safest course of action may be officially disengaging, and doing your duty by filing a SAR.

Further reading on tax fraud and anti-money laundering;

• Tax avoidance: under the microscope
• Money laundering: what are the risks for accountants?
• Criminals are using professionals to ‘clean’ their dirty money
• How to spot fraud’s red flags
• AAT’s guidance on Anti-money laundering and Suspicious Activity Reporting

Iwona Tokc-Wilde is a business journalist.