Crunch time for restaurateur who understated salesby
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.
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.
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).
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.