VAT: Restaurant found cooking the booksby
The FTT found that takings were deliberately suppressed on VAT and corporation tax returns leading to six years of tax investigation for the restaurant owner.
This case concerning an Indian restaurant Exotic Spice (Sprotborough) Ltd (TC04739) reminded me of my article about the VAT issues of moving to a cashless society, where most payments are now made by card rather than cash.
HMRC’s view was that the company had deliberately suppressed its cash sales, leading to large assessments for both corporation tax (£136,849) and VAT (£73,219) plus interest and penalties. This invites the question; could a company with 100% card sales suppress its sales? I think it is far less likely.
HMRC surprise visit
Friday 10 May 2014 is a date that will stay in the mind of the director Ala Uddin for a very long time. This was the day that HMRC officers made a covert visit to check the daily takings figure of the business, and their presence certainly brought the company some good luck:
The total takings figure on this day were £2,457, of which 55% was from debit or credit cards and 45% from cash;
This figure was higher than any other Friday evening since the company started trading – the next best figure was £2,259 on 1 March 2014;
Since 19 September 2013, the daily takings figure had exceeded £2,000 on only four nights of trading out of 974 days.
The 55/45 split between card and cash payments on that day was very different to the 90/10 split declared in the accounts for the year ended 30 June 2014. A waiter working for the business told HMRC that a typical split between card/cash takings was about 50/50. He subsequently tried to reverse this opinion. HMRC concluded that the business had been suppressing the cash sales in its records.
When HMRC alleges that takings have been understated deliberately, and the above anomalies certainly gave a strong indicator that there was a potential problem, officers like to collect other evidence to support their findings. There were many other indicators of suppression but the most significant was that for many evenings the declared takings figures were lower than the total card sales for the nights in question!
Best judgment assessment
The HMRC officer raised VAT assessments based on s73, VATA 1994, which requires the use of ‘best judgement’ in the calculation process. The ratio of 55/45 between card and cash sales on 10 May 2014 was the method used to calculate total takings (projected) and assess the difference compared to declared takings. The tribunal supported HMRC’s method in principle and agreed that takings had been suppressed. However, a few specific issues relevant to the figures were left for the parties to resolve between themselves.
I used to enjoy a night out at an Indian restaurant in Manchester and was always surprised by the total reliance of the cashing up process on handwritten bills, menu pads and other bits of paper, and even the till was an old cash drawer. The message is clear: if a business wants an easy life with HMRC, then automated till receipts, a clear audit trail between the sale of a meal through to daily gross takings and the submission of quarterly VAT returns will definitely help. A card-only business makes the VAT trail even tighter.
An indicator of the amount of pressure the director had to deal with is illustrated by the fact that HMRC’s first meeting with him was held on 6 June 2013, and the tribunal’s decision was finally given on 30 October 2019. That’s over six years in total, meaning he had a lot of time worrying about HMRC rather than focusing on the company’s core business.
Uddin maintained that there had been “no suppression of takings” in the company records but the conclusive evidence of HMRC’s visit on 10 May 2014 suggested otherwise.