HMRC horror show: Five learning points from restaurant VAT case
Neil Warren analyses a case about alleged suppression of sales on VAT returns from a restaurant and highlights some important learning points.
As far as the first tier tribunal case of Chinese restaurant owners Wei Xian and Qian Hong Peng (TC7523) is concerned, the HMRC officer involved in the case should be made to stand on the stage of a crowded theatre and sing the famous song: “If there’s a wrong way to do it, nobody does it like me.”
The case related to alleged suppression of sales (and therefore output tax) on VAT returns submitted by the partnership between June 2011 and March 2015. HMRC initially assessed underpaid VAT of £158,953 in August 2016, largely based on on-site observations made about the ratio of cash versus card sales. The officer concluded that half of all cash sales were omitted from the returns.
The tribunal’s decision concluded that the VAT underpaid was £5,682, so it was not a good outcome for HMRC considering the officer spent a lot of time doing the calculations and reviews, as well as four undercover visits. Here are five learning points from this fascinating case.
1. Internal reviews of assessments by HMRC are worthwhile
The assessed amount of £158,953 was initially reduced to £95,365 following an internal review by a separate HMRC officer. The reduction corrected some large arithmetical errors made by the original officer, and also a bizarre decision to assess output tax on rental income (for part of the premises sublet to another restaurant), even though the partnership had never opted to tax the building so it was exempt from VAT.
2. HMRC has one year to raise an assessment once they have full facts available to them
The assessment was raised on 1 August 2016 but HMRC had the full facts about their findings by 25 May 2015. The assessment was therefore raised out of time as far as the usual four-year error correction period is concerned, meaning that HMRC could only assess periods going back two years from August 2016. So, periods up to and including June 2014 were out of time, leaving only periods September 2014 to March 2015.
3. The onus for proving ‘deliberate’ suppression of sales is on HMRC
HMRC said that because output tax had been deliberately underpaid by the taxpayer, their power of assessment went back 20 years. This power is given by s77(4) and (4A), VATA1994 but the tribunal disagreed; there had been no subjective proof that takings had been deliberately suppressed by the partnership. The onus is on HMRC to prove that the taxpayer is guilty and not for taxpayers to prove they are innocent.
4. Officers must follow HMRC’s internal guidance and consider whether an assessment is credible
If HMRC’s assessment was correct, the business would have ‘hidden’ sales of nearly £3,000 a week. Was this realistic for a business supplying buffet-style food in the small market town of Boston? HMRC policy note VAEC1510 from the VAT Assessments and Error Correction manual is worth a read, including the comment that officers should ask the question: “Could the business have actually under-declared this amount of tax?”
5. Officers must show they have used their ‘best judgment’ with any calculations they make
Officers can raise an assessment when they consider that VAT has been understated on a return submitted by a business, this power being given by s73(1), VATA1994. The officer’s conclusion that 63% of total sales were ‘cash’ was rejected by the tribunal, which decided that 43% was a more accurate figure, taking all evidence into account.
To balance the books, the partnership did not help the situation with some poor record-keeping, including a faulty till that did not have a battery. The reality was that HMRC had strong indicators that there was a VAT problem but not enough evidence to support the drastic actions taken by the officer with her assessment.