We’ve all had those moments where everything seems to be going smoothly, then the rug gets pulled out from under you. For one of my clients, this rug was more of a carpet – a posh, expensive one – that had been soiled by years of neglect, bad luck, and some unfortunate decisions. The story starts with a bloke who had his head in the clouds, making more money than he could keep track of, but found himself in a right financial mess. If you’re in the property business, particularly dealing with VAT compliance, this might hit closer to home than you’d like.

Let’s set the scene: a successful property business owner who could easily pay his bills with his spare change, was too busy living the high life to bother with the donkey work, like his finances. If he needed something done, he signed the papers and moved on, trusting the details to take care of themselves. It worked – until it didn’t.

The vision was a hotel turned luxury block of flats in a prime spot for the ultra-wealthy. Two top-end penthouses, four slightly smaller ones, and then a collection of swanky apartments. He’d even secured a 12-month option on the hotel. The architect assured him planning permission was a done deal, so he forked out over £100k into getting the plans drawn up. With what he thought was planning permission in hand, he approached a funder who was ready to give him over £14 million. There was just one minor problem, the architect had jumped the gun. The planning permission hadn’t actually been granted, and the whole deal collapsed like a house of cards. In the thick of Covid. Just to make matters a hundred times worse.

And it didn’t end there. His books hadn’t been touched for four years, so reclaiming the VAT became a ballache. And I won’t even go there with the state of his personal and corporate tax affairs. Which brings me on to why VAT compliance is so important.

Why VAT compliance matters

VAT compliance might not be the most thrilling part of running a property company by all means, but it’s one of those things you’ve got to get right. Mess it up, and you’re looking at penalties, investigations, or worse. It’s not just about avoiding trouble, either. Proper VAT management can save you a fair amount of cash, especially when you’ve got big projects on the go.

Common VAT mistakes in property

When it comes to VAT, property companies often trip over the same issues:

1. Misunderstanding the option to tax: This is a big one. The option to tax can be a breakthrough in commercial property transactions, but if you don’t understand when and how to apply it, you’re setting yourself up for trouble.
2. Misunderstanding the difference in VAT rates: Depending on the form of property the VAT rates differ. New buildings tend to come with a 5% VAT rate, whereas for longer existing buildings it’s the standard 20% VAT rate. Then there’s extensions, which could be either.
3. Incorrect VAT treatment on sales and leases: Categorising supplies incorrectly – whether they’re standard-rated, zero-rated, or exempt – you best believe it’s going to attract HMRC’s attention.
4. Reclaiming VAT on allowable expenses: Many property companies miss out on reclaiming VAT on legitimate expenses, like construction and maintenance costs. That’s money left on the table.
5. Managing VAT in mixed-use developments: If your property has both residential and commercial elements, things can get tricky. Misallocating VAT in these scenarios can cost you dearly.
6. Missing VAT exemptions: From new builds to residential conversions, there are exemptions available. Not knowing about them or applying them incorrectly can result in big tax bills.
7. Errors in VAT on land transactions: Land transactions and leases are particularly tricky due to complex rules and specific circumstances. Knowing when VAT does and doesn’t apply will help you avoid costly errors with HMRC.
8. VAT registration mistakes: Many property companies fail to register or register too late and end up with penalties from HMRC. You must register for VAT if your taxable turnover exceeds £85,000 in a 12-month period.
9. Failing to keep proper VAT records: Poor record-keeping can cripple your VAT position. Without detailed records, how are you going to support your VAT claims or accurately report to HMRC?
10. Errors in partial exemption calculations: When dealing with both VAT-exempt and VATable supplies, partial exemption rules come into play. Incorrect calculations of recoverable VAT leads to potential over or under claiming. Get it right to avoid HMRC issues.
11. Failing to adjust for VAT on capital goods: Major refurbishments and equipment purchases fall under the Capital Goods Scheme. Neglecting to adjust your VAT returns can lead to incorrect claims and potential fines.
12. Ignoring the importance of timely VAT returns and payments: Making sure your VAT returns and payments are on time is essential. Missing deadlines means penalties and interest charges, which will affect your cash flow whether you like it or not. Using accounting software (I recommend Quickbooks), setting up direct debits, or working with an accountant will help you stay on track and avoid late payments.

Rebuilding the books

So going back to my client story, after the deal collapse and four years of neglected accounts, my client had to get serious about sorting his finances. We rebuilt his books from scratch, digging through old records, finding missing paperwork, and piecing together his VAT reclaim. It wasn’t glamorous work, but someone had to do it. By the end of it, we’d turned an initial VAT reclaim of £38k into a whopping £130k – money that made a real difference in getting him back on track.

But, as you can imagine, this level of reclaim didn’t go unnoticed. This is HMRC we’re talking about, of course it triggered an investigation. Thankfully, we’d done the legwork, ensuring everything was above board. The key takeaway? If you’re going to reclaim significant amounts of VAT, make sure your records are immaculate.

Putting safeguards in place

With his finances back in order, it was time to ensure he didn’t end up in the same mess again. So I had to lay out a couple of ground rules. Starting with the non-negotiable, no major financial decisions to be made without consulting me. He had to give Cloud Accountancy full say-so of his finance department. All bills are to be paid through Apron (no more relying on the wife!). And most importantly develop a cash flow forecast and solid business plan to keep everything on track.

Lessons learned

The biggest takeaway from this client’s story is that success isn’t just about making money; it’s about managing it well. Here are some lessons worth noting:

1. Don’t neglect your books: It’s tempting to let the paperwork pile up, especially when business is strong, but it will come back to bite you and it won’t be pretty.
2. Understand the rules: VAT is tricky to get your head around, but ignoring it only multiplies the problems. If you’re unsure, get advice from someone who knows their stuff (i.e. me!).
3. Keep records up to date: Whether it’s invoices, receipts, or bank statements, having everything in order can save you the misery if HMRC comes knocking.
4. Plan for the worst: Covid was a wake-up call for many business owners. Building financial resilience isn’t optional; it’s essential.

Final thoughts

VAT compliance might not be the most exciting topic, but getting it right can mean the difference between thriving and just about surviving in the property game. Don’t let poor record-keeping or a lack of knowledge catch you out. And if you’re already in hot water, do something about it now. There’s always a way forward, it might just take a bit of graft (and the right people in your corner) to get there.

Need help with your VAT affairs or just fancy a chat over a brew? Give me a shout. If there’s one thing I’ve learned, it’s that no problem is impossible with the right approach – and maybe a mini dachshund like Toto by your side for moral support.

Interested to find out more?

Call us on 01617 985789

Or book a meeting at https://calendly.com/d/ckfd-tzk-zbb

The Challenge

My client, let’s call him Dave, was pretty trusting with his money. He knew his accounts and bookkeeping were important. However, he left the financials to his other half, thinking all was ticking along fine and under control. By financials, I mean his wife ran his payroll, did his books and payments. In fact, there were many bank accounts that his wife was the only signatory for. After all, they were both in it together and wanted the same things. Didn’t they? 

But unfortunately, this wasn’t the case. As with many things, relationships often go well when the business and money is good. When Covid hit, many of Dave’s projects were put on a ‘stop’ and several large outstanding invoices were left ‘pending’. These were not the only serious issues Dave faced. He’d stopped looking at his finances and accounts. He just believed that his wife had it all in hand. His accounts were a mess and Dave didn’t know what he owed and how much he could take out of his bank account. A number of tax payments to the revenue had been missed and the brown envelopes were mounting up.

As you can imagine the pressure mounted up. As with many husband and wife teams, the relationship needs to be pretty strong to cope with a business under immense strain. Sadly for Dave, his wife decided to chuck him out and ask him for a divorce. I then get a very distressed phone call as Dave now realises that he hasn’t got access to his bank accounts and his wife is holding the dog and his passport as hostage until Dave agrees to her demands. By the way, no word of a lie, this part of the story is absolutely true. 

Oooops.

My approach

As an accountant with decades of experience of cleaning up messes often in hospitality and construction, you could call me an expert in this scenario. I will confess that sorting out husband and wife relationships are not my thing. But getting Dave back up and straightened out with the tax man and solvent again is my thing.

Here’s how I saved Dave and his firm from going under.

1. Sorted the mess:
   First things first, I needed to get a handle on Dave’s finances and believe me this was not a straight-forward job. But it rarely ever is. Often the starting point with situations like this is to go back to a point where we are confident that the accounts are correct. In Dave’s situation this was the last 7 years. My team and I then practically rebuilt the books from the ground up. Thankfully we were able to get copies of his bank statements, sales invoices and most but not all of his receipts and purchase invoices. I’ll say one thing for his soon-to-be former wife, she did put Dave’s business onto the cloud, which meant once we had gained access to the accounts, we had most of the information we needed. Then, we went through his accounts with a fine-toothed comb, highlighted the inconsistencies and started to plan out corrective measures. 
2. Dealt with the taxman:
   Tax issues? Yeah, he had them. Given that his accounts were, to put it simply, not a true and accurate reflection of his actual trading there were problems with VAT, CIS and his tax returns. When I had the accounts together I worked out what had or hadn’t been claimed and I put together a plan to get him square with the taxman. This is something we often do called ‘voluntary disclosure’. A voluntary disclosure means you are often on the front foot with the revenue and any fines levied are less than if the Revenue came after you. I’d like to say there were no fines involved. But I was able to plead significant mitigating circumstances – sometimes it is helpful for your wife to divorce you acrimoniously! These mitigating circumstances meant we were able to get a payment plan in place to make good the difference between the tax paid, the tax owed, the fines levied and what should have been paid. 
3. Got the cash flowing:
   Cash flow in a construction business should be like a pint of cold beer after work on a Friday – smooth and forward-moving. Sadly, it rarely happens that way. What was needed was a bit of breathing space for Dave. So, I restructured the business’s cash flow strategy by renegotiating payment terms with lenders, got a short-term loan agreed and got some of the outstanding large invoices paid. It’s amazing how menacing Toto barking in the background can sound when on the phone to ask for payment on behalf of a client. This not only improved cash flow but when the large outstanding invoices started to be paid restored the lenders confidence. Win-win!
4. Legal and debt management:
   With the tax issues came the legal headaches. Particularly with Dave needing to work out what his assets and income was as his wife’s divorce solicitor was going to be demanding this soon. Getting a new loan meant that Dave needed to take on more borrowing. However, we ran a cash flow forecast and looked at efficiencies within the business to ensure that Dave could pay back this loan AND also his other borrowings. We also needed to adjust the business shareholding so that his soon-to-be-ex-wife (who was resolutely not agreeing to shared access with the dog!!) no longer had any pecuniary interest or formal influence on the business. That took a little bit of delicate negotiation.
5. Continuous support:
   Lastly, it wasn’t just a case of fixing it and leaving. We’ve now got an arrangement that consists of us doing his bookkeeping, keeping a tight handle on his cash, and regular reviews to keep things on track and prevent future problems. After all, Dave needed a new finance department after he realised his wife had ‘resigned’ from that role!

The Result

With a bit of hard graft and some sharpness, we managed to turn it around:

• Dave dodged a large bullet with the taxman. Although his fines were much smaller than first thought.

• Got his cash flow moving again. 

• Saved his business and also removed his soon-to-be-former wife from his business affairs.

Key Takeaways

There’s several lessons learnt here:

• Stay in the know: Don’t leave your finances till the last minute. Keep your eye on the ball.

• • Don’t be too trusting. Always make sure that regardless of who is doing the invoicing, bookkeeping and payments that, you do regular reviews of what is happening.

• Get help before you’re in too deep: Got financial worries? Get hold of expert financial advice. There’s a time and a place for it to be handled amateurishly; dealing with HMRC is not one of them.

• Be proactive: Dealing with issues promptly prevents things from escalating. Definitely don’t ignore brown envelopes.

• Cash matters: Keep the cash flowing. No cash flow, no business.

Conclusion

Bad things happen, even to the best of us. But with the right accountants behind you, you can pull through anything—just like Dave did. 

So, moral of the story: Don’t be too trusting and if your finances are looking a bit off, don’t hesitate to give me a shout. Let’s get you sorted before the ref blows the whistle.

We’ve all had those moments where a letter drops through the letterbox and you instantly get that horrible sinking feeling in your stomach. For many construction business owners, that dreaded letter comes from HMRC. It’s a nudge letter, a not-so-subtle reminder that your tax affairs might not be as squeaky clean as you’d hoped.

Why the nudge?

Unfortunately, HMRC aren’t just sitting around twiddling their thumbs. Their advanced systems can spot a discrepancy a mile away, with accuracy. If you’ve been a bit sloppy in your record-keeping or missed a few deadlines, you might find yourself on their hit list.

Common reasons for nudge letters in construction:

• CIS antics: Errors in CIS returns or payments to subcontractors can trigger a nudge. It’s important to understand CIS and its complexities fully. If you need a hand with this give me a shout, alternatively, I’ve covered CIS in a previous blog. You can read it here.
• VAT issues: Incorrect VAT returns, especially for construction-specific schemes like the reverse charge.
• Income and expenditure mismatch: Discrepancies between your reported income and expenses.

A real-life example

One of my clients received a nudge letter from HMRC. At first, he was a bit flustered. After all, he’d been running his construction business for years and thought he had everything under control. But as I went through his records, I discovered a few minor errors that could have led to significant tax penalties.

If you know me, you know I’m not one to shy away from dealing with HMRC. So, I quickly got to work, reviewing his records, finding the errors, and communicating with HMRC to address their concerns. Luckily, thanks to swift response, we were able to resolve the issue with a slap on the hand and no major consequences.

Luckily, he had me (a tax professional that specialises in construction) at hand to handle it promptly. However, if you don’t already have an accountant I would strongly recommend following the steps below as soon as possible.

How to respond to a nudge letter

1. Don’t panic: It’s easier said than done, but it won’t change anything. So, take a deep breath and assess the situation calmly.
2. Seek professional advice: Consult with a qualified accountant, preferably with years of industry-specific experience, to help you understand the implications and come up with a strategy to get you out of the mess.
3. Gather your records: Gather all relevant financial documents, such as invoices, receipts, and bank statements. You know the drill.
4. Communicate with HMRC: Respond to HMRC promptly and provide any requested information. Don’t gatekeep anything or try to outsmart them, hand over whatever they ask for.
5. Consider a voluntary disclosure: If you’ve made significant errors, a voluntary disclosure may be a viable option. By doing this, you’re showing full transparency and cooperation with HMRC, which could work in your favour and result in reduced penalties and prevention of prosecution.

Remember: This is not a time to DIY it.

Avoiding future nudge letters

Construction is one of the most time-demanding industries, so falling behind on the financial side of things is something I see and deal with often. Making sure you set time aside each month to check your books are up-to-date will help to avoid a run in with the tax man. If you really don’t think you have time to do this, it probably means it’s time to look for an accountant that can take the weight off your shoulders.

To avoid future HMRC scrutiny, consider these tips:

• Keep accurate records: Maintain detailed records of all financial transactions. From paying subcontractors and employee wages, to purchasing materials and site expenses.
• File tax returns on time: Set reminders and consider using tax software to automate the process. My real preference is Quickbooks.
• Seek professional advice: Consult with a qualified accountant to ensure compliance with tax regulations.
• Stay updated: Keep ahead of changes in tax laws and regulations.
• Improve financial discipline: Establish effective systems to track income, expenses, and tax requirements.

Don’t forget, a timely response to an HMRC nudge letter can save you time, money, and stress. Don’t push it aside or ignore it, unless you want the situation and repercussions to escalate.

Consequences of ignoring a nudge letter

Ignoring an HMRC nudge letter can lead to serious consequences, including:

• Increased penalties: HMRC may impose hefty fines for late or inaccurate tax returns.
• Deeper investigations: A nudge letter can trigger a more thorough investigation into your tax affairs. You might not want them to see that pricey Christmas present that you got your other half in your expenses…
• Potential legal action: In severe cases, tax evasion can lead to legal action. Do you throw away all the effort and time you’ve put into your business by damaging your reputation?

Don’t let a simple oversight turn into a major headache. If you receive a nudge letter, take immediate action. Consult with a tax professional to understand the implications and develop a strategy to resolve the issue.

Need help with your tax affairs? Let’s chat over a cuppa.

Interested to find out more?

Call us on 01617 985789

Or book a meeting at https://calendly.com/d/ckfd-tzk-zbb