Independent VAT Consultant
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VAT: Restaurant found cooking the books

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.

28th Nov 2019
Independent VAT Consultant
Columnist
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A bowl of chicken tandoori
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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. 

Other evidence 

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. 

Learning points

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. 

Six-year enquiry

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.

Replies (25)

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By memyself-eye
28th Nov 2019 13:52

Our local Indian has hand written receipts, no VAT number and sub lets the upstairs flat...hmmm.

Nice food though.

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By GHarr497688
28th Nov 2019 20:19

When I see HMRC writing off thousands of pounds in unpaid tax because they havnt bothered to collect it this case seems rather futile . It has to be done though.

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By johnjenkins
29th Nov 2019 10:37

You mention a cashless society. Have you really looked at how many outlets now have signs saying "machine not working" cash only. The card only places are expensive which means Joe Bloggs will go to the lower priced business so, of course, there is room for supressing sales. Cash was, is and always will be king.
The point in question is how many people actually don't trust banks and cards and only use cash? More than you would think. As technology leaves ordinary people behind the situation will get worse. Did they find any illegals????????????? Always reminds me of "border force" where an employee of an Indian restaurant went up to greet the investigator because he had met him the previous week in another Indian restaurant and was told as he was an illegal he couldn't work in that restaurant. Tip of the iceberg.

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By sammerchant
29th Nov 2019 10:53

There is a barber's shop near Warren Street in London's West End. Haircuts start at £35! But it's 'Cash Only'!!

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By bobsto12
29th Nov 2019 10:55

Whilst a cashless society would solve hmrcs problems with naughty businessmen the loss of privacy to the population generally is quite scary. Governments shouldn't know everything about you and what you do.

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Replying to bobsto12:
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By johnjenkins
29th Nov 2019 11:04

Have you got hiccups?????????????

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By optimist
29th Nov 2019 11:20

Goodness gracious me, who would have believed it.

Next thing your going to tell me is that the owners of Indian and Chinese restaurants also have property investment companies funded from unknown cash sources.

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By malcjoyce
29th Nov 2019 11:33

I am surprised that HMRC got away with this on the basis of one sample. At least three or more visits, perhaps on different days to get a better estimate should have been made. Also, the estimate of the waiter should be discounted as it could be argued that he would not have full information.

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Replying to malcjoyce:
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By RogerMT
29th Nov 2019 12:38

Good point. Perhaps the head investigator doesn't like curry? :)

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Replying to malcjoyce:
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By whitevanman
30th Nov 2019 13:31

Have you actually read the case?
They went back for a second "invigilation" and were refused access, so observed from outside.
Also, the tribunal dealt with the waiters evidence but clearly thought that, as he had worked there for 7 years he probably knew whether a 50/50 split was more likely than 90/10. They did not really give it more credence and the decision was based on the evidence before them. Also actual numbers were left to be agreed by the parties because of several calculation issues and one assumes the parties will agree something that reflects the facts (or maybe I am being naive).

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Replying to whitevanman:
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By malcjoyce
01st Dec 2019 18:12

No, I did not read the case as I assumed quite reasonably that article included all salient facts. Clearly you have 'dug' into this case and revealed more! The point I was making was that a sample of one is not sufficient to arrive at a conclusion concerning the split of cash/credit card payments over time - this is based on applying basic statistical theory.

If the restaurant owners chose to settle on that basis then so be it. Perhaps it was to their advantage! But that is a different matter.

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Replying to malcjoyce:
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By whitevanman
02nd Dec 2019 09:48

It is sad that a professional chooses to comment, adversely, on what was done, without checking the facts. Ironic really because the whole point behind your comment would be that the "facts" revealed by one test purchase need to be validated by further such!
Again you refer to the appellant "settling" for something. Read the case and you may then understand what actually has been done by whom and what ( very little) has actually been agreed and by whom. The tribunal decision is essentially one in principle and it has been left, for now, with the parties to reach some agreement as to quantum. Whether that causes the appellant to co- operate and be more reasonable remains to be seen. Only with such co-operation could HMRC arrive at a statistically better estimate of the amount of suppressed takings. Of course the result will only be as good as the information used to generate it and inevitably, I think, the answer will be inaccurate ( on any basis) because of changes in societal behaviour and the rise of the cashless society (that others have referred to) over the period actually covered by the enquiries.
Still, let's not spoil a comment for want of facts eh!

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Replying to whitevanman:
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By sammerchant
03rd Dec 2019 10:03

That's one of the more condescending comments I have seen on AW. Just saying.

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By neiltonks
29th Nov 2019 11:36

Fixed-price "eat as much as you like" buffets provide a particular opportunity. Years ago, I used to visit one which had a fixed price including soft drinks on certain days. Payment was by cash only and often you didn't even get a handwritten receipt unless you purchased extras such as alcohol, since the bill was always a fixed amount otherwise. The place is long-gone now (pity, the food was good!), but I bet it was a good source of tax-free cash for its owners.

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Nefertiti
By Nefertiti
29th Nov 2019 12:05

Most cash based businesses suppress their takings, that is why you see their directors and their partners driving the latest cars and living in posh houses (within a few years of starting the business). It is only when greed takes over and the suppression becomes too obvious that problems start.

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By Geezer
29th Nov 2019 12:22

If his daily declared sales were often less than the card sales alone, you wonder how the investigation could've taken six years to conclude!

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By SWAccountant
29th Nov 2019 13:23

I can't buy a Chineese or Indian in my town without using cash. Card is not an option.

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Replying to SWAccountant:
Hallerud at Easter
By DJKL
02nd Dec 2019 11:20

No deliveries, you are deprived?

I did not understand how prevalent the online ordered takeaway was (paid by card) until my kids returned from university- it also in part explains why they had no money when at university

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By jamiea4f
29th Nov 2019 13:49

There will never be a "cashless society" whilst there are so many cases of card fraud, online banking scams etc etc. HMRC want there to be one, as it saves them actually having to investigate cases like this, but in my opinion until fraud can be severely reduced, there's no chance.

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By eppingaccountant
29th Nov 2019 14:14

I suppose that if the owner subtracted a figure from actual card sales to record sales....that was an Indian 'take away'!!

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Replying to eppingaccountant:
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By Geezer
29th Nov 2019 14:24

boom boom

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wolfy
By rob winder
29th Nov 2019 14:55

I had a client that was a takeaway selling sandwiches, salads and hot meals. Before HMRC knocked on his door they sat outside his shop on numerous occasions to count the split between hot and cold meals. His split was 80/20 cold to hot, HMRC's count was 80/20 hot to cold. How could they tell the difference? Hot stuff was carried out in a Styrofoam box, cold stuff in a paper bag. The colour drained from his face and his pants turned brown when they told him this. I also had to do a detailed analysis, line by line, for every purchase invoice for three month to analyse whether it was used for hot or cold food. Nice earner for me though, he had tax investigation insurance and the case went on for three years.

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Replying to rob winder:
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By sammerchant
01st Dec 2019 13:59

It never ceases to amaze me that people assume they will never be found out. As an auditor in an earlier life, I came across this attitude quite often. And then they are seemingly contrite when discovered to be fiddling either HMRC or their employer or both.

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By ireallyshouldknowthisbut
29th Nov 2019 14:56

My old house (and office) was in a mixed street, at the top of which was a Chinese Restaurant. Very prominently in the window was the sign "10% off for cash".

Needless to say, I declined to be appointed as their accountant when one day they called me to say they had some problems with HMRC.....

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By buttercup books
30th Nov 2019 17:32

Once knew a "pick your own fruit" farm, (not my client ) mostly cash, but the owner, for religious reasons, was meticulous in his books, viewed stealing from the tax man as a crime against God, he ended up assessed by HMRC as 30% under declaring, on the basis that all cash business under declare so you must, nothing he could say would convince them otherwise, but knowing the man, probably didn't get professional help, it's not a fair world, even for honest people, bb

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