Independent VAT Consultant
Share this content

VAT: No cheers for landlord’s errors

Neil Warren explains why HMRC could raise a VAT assessment covering 13 years of under-declared sales when the usual time limit for assessments is four years.

30th Jun 2020
Independent VAT Consultant
Share this content

We can now visit pubs again if we obey the social distancing rules. Pub landlords will be desperate to encourage customers to spend freely in order to save their businesses, but they need to be careful to declare all takings or they could end up with a huge VAT bill like Kevin Lamb (TC7692) who traded as The Dolphin Pub.

HMRC carried out a routine compliance check on the VAT returns for The Dolphin in early 2017. The first problem picked up by the HMRC officer was a big discrepancy between the sales declared on Lamb’s VAT returns compared to the turnover figure in his annual accounts. Needless to say, there were more sales in the accounts.

On the trail

A difference between the turnover and outputs figures for a cash business always raises the interest levels of a visiting HMRC officer. It indicates that the daily gross takings figures are flawed. Lamb admitted to the officer that “he had understated his VAT liability since he was registered as The Dolphin public house.” 

Twenty-year assessment limit

The HMRC officer raised an assessment using the power of ‘best judgment’ given by (s73(1),VATA 1994) for the period from March 2004 to September 2017. It covered a longer period than the usual four years because of the deliberate actions of the taxpayer, which allows HMRC to go back a maximum of 20 years to assess underdeclared tax.

The VAT assessment was based on till records covering a 251-day period, making an allowance for input tax needed to achieve the sales figures. A penalty assessment for ‘dishonesty’ was raised for the earlier periods under VATA 1994 s 60. For the later periods, the landlord’s actions were judged to be deliberate and the penalty was calculated from the rules in Sch 24, FA 2007.

As Lamb was found to have made deliberate errors and the tax involved is likely to have been over £25,000  (the amount was not stated in the case report), he may well have his name and address published on the list of deliberate defaulters.

Till readings

Lamb challenged the methodology used by HMRC on the basis that he “does not accept that these till readings were correct.” The figure was too high for a “two-room pub on a council estate.” He claimed that allowances should be made for overrings, staff thefts, happy hours and the fact that his pub only sold six to seven barrels of beer a week and not 12 as projected by HMRC.

Appeal dismissed

The tribunal dismissed the appeal, saying that the HMRC officer’s calculations based on till readings were “perfectly reasonable, fair and honest.” She had used a “fair and reasonable methodology” and there was no guesswork involved.

Learning points

There are three important lessons from the case:

Turnover and outputs should be reconciled each year

Why did the accountants not carry out an annual check to ensure that the turnover and outputs figures as per the VAT returns were consistent? This would have alerted a VAT problem much earlier.

When HMRC asked the accountants about the difference, their reply acknowledged a problem: “It appears the takings given to us for the VAT are under-declared, the discrepancies picked up when the final accounts are prepared.” Why was the difference not discussed with the client and corrected on a future VAT return or the VAT652 disclosure form?

Propose alternative calculation methods

The onus is on the taxpayer to clearly show why HMRC’s ‘best judgment’ calculations are incorrect, and to provide a more reliable methodology than the officer. Lamb failed to do that.

For example, has the officer failed to take into account important information? Is there a logical explanation to explain the low VAT payments? Some of the taxpayer’s claims were bizarre, for example – he thought there were over-rings but no under-rings.

Retain supplementary records

I am a big believer that cash traders should keep all supplementary sales records if they wish to avoid a problem with HMRC, such as: till rolls, z-readings, cash reconciliation sheets. Many businesses, including pubs, have regular stocktakes from independent stocktakers that calculate an expected takings figure and compare this to actual sales. Keep those reports as well.


If a cash business has got nothing to hide, the owners should be happy to retain all secondary records and make them available to HMRC officers. The owners should also encourage their accountant to check the VAT return figures each year. The threat of a twenty-year VAT assessment should be a big incentive to comply.

Replies (1)

Please login or register to join the discussion.

By Ben Alligin
01st Jul 2020 10:36

Why doesn't HMRC check the data itself? I thought they were all one big happy family now. If HMRC has the tax returns (corporate or sole trader) for the business concerned, it is not exactly rocket science to estimate the output VAT expected on the net turnover figure declared annually. If that figure is nowhere near the total box 1 figures reported for the year, then there is a rabbit off somewhere (as my father used to say).

Does HMRC VAT not speak to HMRC Tax? It never ceases to amaze me.

I briefly had a client for whom the previous accountant advised that they thought their ex-client was a tad behind with their VAT returns in the professional clearance letter. Tad didn't quite cover it, 8 years or 32 returns was the eventual answer. The client had merely paid the occasional VAT determination issued by the VAT office and everyone was happy. Client particularly happy since they were in debt to the VAT office for £400K. Bizarrely the tax returns had been filed, so HMRC had access to their net turnover for the past 8 years. All supplies were UK and fully VATable, but no-one seemed remotely interested in multiplying the net turnover by the relevant VAT% to see if it came close to the VAT determinations issued.

Thanks (2)