Stay tuned for the big reveal – the name of the accountant responsible for this catastrophic situation will be unveiled soon. But first, we’re working to negotiate a settlement with HMRC on behalf of the landlord who’s now facing a hefty bill in taxes, interest, and penalties. We won’t rest until we’ve secured a fair and just outcome for our client.

It all started with a webinar hosted by AlphaLetz, a landlord software company, two months ago. I was invited to speak as a guest and during the session, I answered a question about mixed partnerships that raised alarm bells for one of the attendees, a landlord we had never met before. That landlord later became our client, and we uncovered several shocking mistakes.

In 2019, the landlord was advised to create a Limited Liability Partnership “LLP” and merge two property investment businesses. Prior to that, he had been operating one property investment business in his own name and another within a Limited Company.

As usual, the first step in the tax planning consultation was to review all documentation. Unfortunately, many gaps were discovered. The LLP structure recommended to him had been presented on a whiteboard, but there was no documented follow-up explaining the advice (or perhaps a better description would be ‘sales pitch’) he had fallen for. To be fair to the landlord, he believed he was in good hands at the time. The company he had visited was in a plush office building, just one floor above an HMRC office. Moreover, the firm was an Award-Winning Chartered Accountant, which he had independently verified.

We were expecting to see, as a minimum;

1. A professional letter of engagement confirming the firm was advising and acting for the individual, the company and the LLP members
2. Confirmation of the advice given orally in the meeting, with references to legislation and HMRC Manuals justifying the advice given
3. Details of the individual or entity responsible for the advice and their professional body
4. The firm’s complaints procedure

During the initial consultation process, we discovered two particularly gross errors that will cost our client well into six figures in back taxes, penalties, and interest charges due to incorrect Capital Gains Tax “CGT” and income tax declarations.

The CGT Issue

Our client had been advised to transfer his personally owned Buy-To-Let property into an LLP using a Declaration of Trust. There is nothing wrong with that per-se, but the Trust documentation was badly drafted to the extent that it was unclear as to how the equity in those properties was to be applied to the LLP Members’ Capital Accounts.

However, the biggest problem we discovered was that following the sale of three of the LLP properties (previously owned personally by the landlord) CGT returns had been filed stating there was no capital gains tax to pay. This was not the correct approach because the properties had appreciated significantly in value since they were first acquired. However, our client was advised that transferring the properties into the LLP had reset the CGT base cost for the properties. That isn’t true. LLP’s are tax transparent, so the capital gains on the sale should have been declared based on the gain from their original acquisition value. It may be that the client would not have sold the properties had he been properly advised.

The Income Tax Issue

The accountant had also misled himself and his client into believing that a mixed Partnership between an individual and a corporate Member could distribute LLP profits between Members to achieve the most tax-efficient outcome. However, this is incorrect, and it is explained in an HMRC document called “Policy paper – Partnerships: A review of two aspects of the tax rules,” which can be accessed through this link. Moreover, further legislation commonly known as ‘Transfer of Income Streams’ can be read via this link. Perhaps this is why it was a condition of doing business with the company offering this scheme that their clients must also agree to fire their existing trusted Accountant and appoint them.

The rules surrounding LLP profits are complex, but a simple explanation is that profits to company members can only be allocated proportionately to the ownership of the income-producing assets of the Partnership. This is very different from the way profits have been allocated over the last five years for this landlord. The accountant even has a line on the full LLP accounts that says “Profit/Loss for the financial year before Members remuneration and profit shares for discretionary distribution among Members” but neither HMRC nor Companies House will have seen that. However, the reality is that profit shares for mixed LLPs are not discretionary when allocating profits to corporate members. Sadly, our landlord client had been led by his accountant to believe he could transfer any amount of profit to the corporate Member of the LLP to keep himself a basic rate taxpayer and pay only 19% corporation tax on the company profits. In our opinion, the only reason HMRC has not picked up on this (yet) is that the LLP only needs to file short-form accounts with Companies House due to being regarded as a small business. The information that Companies House and HMRC will have seen will not be anywhere near as detailed as the full LLP accounts and documentation our client has signed off on.

In addition, the company member was claiming tax relief on the entire mortgage liabilities of the LLP. This is not permitted where the company does not own the asset upon which the liability is based and should be taxed as a loan to the owner of the property.

How We Can Help This Landlord

The harsh reality this landlord has faced is that he has significantly underpaid tax. Having come to terms with this, he also realises that he will be in a lot of trouble if he doesn’t come clean with HMRC. He also knows that he will not be able to sleep at night, fearing that moment when he opens the dreaded HMRC letter if he doesn’t ‘do the right thing.’

The good news is that HMRC is usually far more lenient when mistakes like this are reported to them. In this instance, we are confident that HMRC will be agreeable to a reasonable proposal to give the landlord time to pay what he owes.

Nevertheless, the costs of sorting out this mess will not be cheap. Here’s a summary of the accounts and tax returns that need to be corrected: –

• Three CGT returns
• Personal tax returns
• LLP accounts
• LLP partnership returns
• LLP ‘short-form’ accounts filing at Companies House
• Limited company accounts
• Limited company ‘short-form’ accounts filing at Companies House

The above will cost our client around £7,500 + VAT for each of the years the LLP has been operational.

What Is the Long-Term Prognosis?

Our client will survive this, but it will be a harrowing financial experience. Thankfully, it is unlikely to bankrupt him, and he has said there is a good chance he will sell up entirely and retire to a warmer country.

Our client has a solid moral compass. Having come to terms with his position, he also wants us to re-establish Property118 Action Group to help him claim damages against the accountants who have left him in this position. For him (and now us), it’s not just about helping him get his money back. The accountants who advised him have been claiming to have arranged 4,000 of these structures. Hopefully, not all of those landlords will have received such terrible advice and have such a nightmare ahead of them. Nevertheless, as soon as an arrangement with HMRC has been agreed, Cotswold Barristers will offer our client a Damages Based Agreement to help him recover his losses.

We believe many more landlords will come forward after reading this article, and we expect to hear from others if/when HMRC decides to investigate all LLPs set up by this accountancy firm. This is inevitable because HMRC will receive a nice windfall due to this client coming forward. Do you think HMRC will not recognise and chase the potentially massive pot of gold they find by investigating the financial reporting of the other 4,000 mixed partnership/”hybrid” LLPs allegedly set up by the same accountancy firm our client used?

Moving Forward

Step one  – to introduce our client to a new Accountant who will calculate the underpaid tax and inform HMRC and Companies House.

Step two – to negotiate a settlement and manageable payment plan with HMRC to minimise the penalties and interest charges as much as possible.

Step three – to prepare recommendations explaining what the correct ownership structure should have been to achieve the client’s objectives optimally and to calculate further damages incurred due to the correct advice having not been provided.

Step four – to assist our client in recovering damages along with our colleagues at Cotswold Barristers.

Step five – to implement the correct restructure to achieve the client’s objectives moving forward.

We will also work with our client to ensure he understands the tax rules and regulations that apply to his business as we advance. We will provide ongoing advice and support to help him stay on top of his tax obligations and avoid future problems.

As for the accountants who caused this mess, we will report them to their regulatory body and do everything we can to ensure they are held accountable for their actions. It is unacceptable for professionals to provide poor advice and service that can cause their clients significant financial and legal problems.

In conclusion, we are committed to helping our client resolve this terrible tax planning mistake and get back on track with his tax obligations. Our team will work tirelessly to help negotiate a fair settlement with HMRC and provide ongoing support to our client to ensure that he remains compliant with tax rules and regulations.

If you think you might be affected …

We want to help you.

It is extremely important you don’t panic or act in haste, which could make things worse for you. Below is some initial practical advice.

• Please use the ‘wizard’ form we have created below to assess your level of risk.
• If you need to contact the person who recommended a “Hybrid” / Mixed LLP structure to you, we strongly recommend you only communicate in writing with them. If they offer to call or meet you we suggest you only agree to a recorded video conference using Zoom. It is important at this stage that you build your case.
• We recommend you DO NOT appoint a new Accountant or change the registered office address of your LLP or Limited Company at this stage.
• It could work against you if you contact HMRC yourself. They much prefer matters of this nature to be reported in line with professional protocols.

Within the next month or so we will be inviting all affected people who have completed and submitted the form below to attend a webinar hosted by Property118 and Cotswold Barristers with the following Agenda:-

• what is likely to happen if you do nothing
• why HMRC are likely to be far more lenient if they are contacted before they contact you
• the work required to report the correct tax position to HMRC and the typical costs of doing so
• the process of recovering any damages you have suffered

To make it viable for us to run this webinar we need at least 50 people to register their interest. Therefore, if you know of anybody else who might be affected please let them know. If we do not receive that level of interest within the next month or so we will have to reconsider how to progress matters. Our objective at this stage is to keep costs to a minimum.

Please note that we do not have the human resources to speak to you on a one-to-one basis about your case at this point in time, but you are welcome to post questions in the comments section below and we will do our best to answer them.

Mark Smith, Head of Chambers at Cotswold Barristers said …

“This is not a knee-jerk reaction or an attempt to undermine other advisers’ work for the sake of it. Believe me, we are busy enough with our own clientele.

This arises from a number of landlords approaching us with concerns about the robustness of their structures and the correctness of the filings at HMRC and Companies House made in their names.

We cannot sit on our hands when landlords have major problems in their business structures, and these issues are compounding year on year. We have had discussions with one of the major purveyors of this structure, and we agreed to differ. So we have had attempts to work together, but these have been frustrated by lack of transparency by the other advisers, so we were left trying to reverse-engineer what had been put in place.

It is only recently that we have been able to look under the bonnet as it were, with the landlords who have approached us and shown us in detail what has been done in their names, The article is a result of this. It is not guesswork or keyboard-warrior posturing, it is real life for these people and many others. We would have liked nothing more than to have realised that this structure worked as implemented, and no landlord would be in difficulties, but sadly that was not the case.”

Neil Patterson, Managing Director at Property118 Limited said …

“For anyone with a Hybrid LLP it is only a matter of time before HMRC open an investigation into the reporting of their accounts.  I believe we have a moral obligation to warn those people. How they react to those warnings is for them to decide.”

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