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Thai restaurant food

Crunch time for restaurateur who understated sales


A restaurant business without a till, dealing predominately in cash, received covert visits from HMRC. The owner’s weak and apparently misleading explanations led to an easy win for HMRC at the first tier tribunal.

13th May 2022
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Wuttinan Kotpat operated a Thai restaurant on a self-employed basis. One lunchtime in February 2016, HMRC visited Kotpat’s premises covertly and ordered a meal. Further covert visits occurred in June 2016.

In November 2016 HMRC opened an enquiry into Kotpat’s 2014/15 tax return and a meeting was set up. At this meeting Kotpat went over his record-keeping methodology, including his lack of a till and the fact he paid many of his expenses using cash. It was noted that cash drawings were not recorded and were calculated to be the balancing figure in the accounts.

Kotpat also confirmed that his restaurant had never opened at lunchtime, which must have come as a shock to the HMRC officers who had dined there. No records could be found in Kotpat’s books recording the test meals.

Mysterious account

HMRC was advised by the merchant payment processor that Kotpat had a second account in addition to his declared Lloyds account. Kotpat initially confirmed this was with HSBC, before changing his mind and denying its existence.

HMRC calculated that further income of £11,639 was needed to cover Kotpat’s expenses. This in conjunction with the missing test purchases meant HMRC believed sales had been understated.

Enquiries into the 2015/16 and 2016/17 returns were opened in August 2017 and April 2018. Assessments and closure notices were then issued for the four years to 5 April 2017 in July 2018 totalling £63,733.43 in tax and £6,058.81 in penalties.

Kotpat requested a review which found in favour of HMRC. He then took his appeal to the first tier tribunal (FTT).

Apparent shortfalls

Broadly, Kotpat’s case was that HMRC had not provided him with any evidence that he had underdeclared sales, which made sense to him as his records were in his opinion complete and accurate. Any apparent shortfalls in cash had been met via loans from family and friends or savings.

Kotpat provided the FTT with analysis sheets showing various cheques paid out. None of these cheques appeared in the Lloyds account.

He also provided his 2015 accounts which included outgoings of almost £50,000; again, these did not appear in the Lloyds account. 

The FTT concluded that there must be a second bank account which had not been declared to either themselves or to HMRC.

Cash takings understated

The FTT next turned to the alleged underdeclared takings suggested by the missing test meals. 

Kotpat explained that if he had few customers on a particular day, he would sometimes record all the sales on a single ticket, so the test meals would have been part of a larger single figure. HMRC countered that on the days they visited, other individual sales had been recorded, ruling out the single ticket explanation, or no sales had been recorded at all.

After considering Kotpat’s bank statements the FTT found his expenses far outweighed his reported income and that there was no evidence that the shortfall had been met by friends, family or Kotpat’s savings. Further, they noted he had paid £10,000 to a car dealer – not the actions of a person having to borrow from family and friends to stay afloat.

The missing meals and gaps in funding meant the FTT agreed that sales had been understated. They further agreed that HMRC’s estimate of the missing income was reasonable.

Validity of assessments

The assessments for 2014/15, 2015/16 and 2016/17 were all raised within the four-year window stipulated by s34 TMA 1970. However, as the assessment for the 2013/14 year was made after 5 April 2018 there had to have been at least careless behaviour by Kotpat or it would be out of time.

The FTT found that Kotpat’s behaviour in understating his tax had been deliberate, so the four-year time limit could be extended to 20 years.

As there appeared to be nothing unusual about the 2014/15 tax year (and Kotpat had been invited to demonstrate that there was but had failed to do so), the FTT confirmed HMRC was also entitled to assume similar sales were missing from the following years, which they had done.

Food for thought

While Kotpat had not formally appealed the penalties issued, he had commented on them in his case outline, so the FTT considered them.

The range for deliberate and concealed errors is 50–100%. HMRC had reduced them by 55% (to 72.5%) because of:

  • 5% for “telling” – Kotpat had admitted he had a second account before denying it
  • 30% for “helping” – Kotpat attended two meetings and answered questions, albeit, it was noted, inaccurately
  • 20% for “giving” – Kotpat provided records.

The FTT felt no reason to disturb these penalties.

The appeal was dismissed.

Replies (5)

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By Hugo Fair
13th May 2022 17:06

Yet again, I'm stunned ... "HMRC had reduced them by 55% (to 72.5%) because of:
* 5% for “telling” – Kotpat had admitted he had a second account before denying it;
* 30% for “helping” – Kotpat attended two meetings and answered questions, albeit, it was noted, inaccurately;
* 20% for “giving” – Kotpat provided records.

So if charged by the police, one would expect the equivalent (contradicting your own evidence + giving inaccurate answers or saying 'no comment') ... would generate a 35% reduction in sentence?

Thanks (1)
Replying to Hugo Fair:
paddle steamer
16th May 2022 14:10

Maybe re penalty reduction his accountant had negotiated well.

Personally I think the issues with the accounting records maybe ought to have been flagged by his accountant rather than accounts submitted without due regard to how things had been paid, (A cash account is a wonderful thing) , I also wonder what HMRC are now doing re the obviously understated output vat?

Thanks (1)
Replying to DJKL:
By Hugo Fair
16th May 2022 21:43

On the VAT aspect, I agree ... HMRC can usually smell blood from an injured beast (sorry taxpayer - although I use the term loosely in this case) quicker than a piranha so I doubt Kotpat has heard the last of them.

However I see no mention of an Accountant in the article, so had assumed that the conflation of made-up numbers was entirely of his own doing (possibly with a little help from a backstreet book-keeper). [I hasten to add that there are many fine upstanding book-keepers, just not universally round my way].

But I still maintain a look of incomprehension that consistently telling lies and providing inaccurate/incomplete records can be given as 'justification' for a 35% reduction in penalties.

Thanks (1)
Replying to Hugo Fair:
paddle steamer
17th May 2022 10:20

Note 7 features the accountant :

7. A meeting between HMRC and Mr Kotpat, and his accountant, was held on 12 December
2016, during with the following points arose:
(1) Mr Kotpat stated that the business was not open at lunchtime; when asked to
confirm whether the business had opened at lunchtime during the 2014/15 tax year, he stated that the restaurant had never opened at lunchtime.
(2) Sales were recorded each day by totalling the meal tickets and writing the total on an analysis sheet which had been created by Mr Kotpat. Meal tickets were kept in bags, one for each quarter. The completed sheets were sent each quarter to the accountant to prepare and submit VAT and self-assessment returns. The business had no till or cash register. Cash was kept in a locked drawer and counted at the end of the day when a reading was also taken from the credit card machine.
(3) Suppliers were paid either from cash takings or by debit card; Mr Kotpat stated that he did not have any accounts with suppliers. Other expenses (utilities, rates, telephone costs) were paid by direct debit or occasionally by cheque. The employees were paid in cash at the end of the week, with payslips produced by Mr Kotpat’s accountant.
(4) Mr Kotpat took cash drawings of up to £250 per week, depending on the cash
available. When cash was not available, he would withdraw the balance to £250 from the bank. Details of the cash withdrawn were not kept.
(5) The accountant confirmed that drawings were calculated as an estimated balancing figure when preparing the balance sheet.
(6) Mr Kotpat stated that he lived in a friend’s house, paying £50 per week, and so did not have any formal rent or other housing costs.

Thanks (1)
Replying to DJKL:
By Hugo Fair
18th May 2022 12:34

Fascinating - and that'll teach me not to bother going back to the source material, so thanks!

However the M.O. as described doesn't seem far removed from my assumption that "the conflation of made-up numbers was entirely of his own doing (possibly with a little help from a backstreet book-keeper)".
The latter may have been described as an accountant, but the contribution (and connivance / competence) is more akin to my down-market book-keeper ... with nary a sign of anything that could be thought of as a set of standard accounts.

Thanks (1)