HM Revenue and Customs (HMRC) are always on the alert to spot businesses that suppress their cash takings with a view to avoiding tax. However, as a tax tribunal ruling concerning an insolvent fish and chip shop chain showed, suspicions of deliberate wrongdoing are not always justified.
The chain ran on a 'cash only' basis. During a period of about four years prior to the company that owned it entering liquidation, HMRC claimed that its takings had been systematically and deliberately suppressed to the tune of almost £1 million. On that basis, VAT and Corporation Tax demands were raised against the company which, together with penalties, came to more than £600,000.
The company's manager and principal shareholder was also issued with a personal liability notice (PLN) requiring him to pay almost £48,000 out of his own pocket. He denied any wrongdoing, contending that he had inherited a failing and loss-making business from his deceased father and ultimately failed to turn around its fortunes despite having tried very hard to do so.
Upholding his and the company's appeal, the First-tier Tribunal (FTT) noted that the sales sampling technique employed by HMRC during a covert inquiry into the chain's affairs was far from representative of its average takings. The process was flawed arithmetically, and there was no overall consideration of whether it was credible that the company could actually have underdeclared such a large amount of tax.
The FTT noted that, if the chain were as profitable as HMRC claimed, it was hard to see why it would have ceased trading. The company's bank statements consistently showed its account in debit and close to its overdraft limit. There was, in the end, no evidence of organised, widespread or deliberate suppression of sales. The tax assessments, penalties and PLN were all overturned.