These have become a major focus of HMRC interest as they often yield tax liabilities because HMRC are able to ‘break’ the records with comparative ease. However, when HMRC seek to issue excessive assessments off the back of this, then help is required. Our investigations team has experience in both the food & drink sector and in challenging the results of such assessments.
In most cases HMRC will do unannounced spot visits, where they sometimes pose as customers, or observe a business from outside, and take notes of customer visits and orders taken etc.
In two specific cases, HMRC had based VAT and direct tax assessments upon the outcome of covert operations at the business addresses, both of which operated as restaurants.
Case study 1
Restaurant one had been assessed for VAT, corporation tax, interest and penalties totalling £230,000.
Whilst the company accepted that business controls were less than perfect, they believed that they were powerless in the face of the huge ‘best judgement’ assessments raised by HMRC.
Having met with the new client, our team reviewed the case and identified multiple issues where it was considered HMRC had not discharged the burden of proof required by them in order to support their decisions.
A detailed alternative case was prepared based upon business economics, market data and challenging the evidence HMRC relied upon to support the ‘presumption of continuity’ into previous tax years. This was presented in a meeting hastily arranged with the HMRC officers responsible for the various taxes.
Whilst initially steadfast in defending the basis and outcome of their original decisions, the weight of evidence presented forced them to re-examine their own case.
We were then in a position to agree an outcome acceptable to all parties, resulting in a settlement of all tax, interest and penalties of just £11,000, a reduction of over 95% of what was originally faced.
Case study 2
Restaurant two was subject to a tax enquiry where there was no dispute that VAT and income tax arrears existed. Again, HMRC had proven their case that the business records were incomplete and had used the information collated covertly to arrive at assessment values totalling over £370,000; a
sum that would inevitably result in insolvency for the owner and the subsequent loss of all personal assets.
Through face to face discussions and by presenting an alternative interpretation of the data collated, we were able to highlight weaknesses and assumptions in the HMRC case. Similar information which undermined their position would have been produced at any future VAT and duties tribunal. HMRC were fully aware of this and therefore were open to reaching a settlement that would avoid entering into that process.
Total tax liabilities including VAT, corporation tax, penalties and interest were proposed by us and accepted, totalling just over £50,000, an 85% reduction from the initially assessed values.
The lower settlement amount allowed the taxpayer to enter into payment arrangements with HMRC and avoid the previously anticipated bankruptcy proceedings. In each of these cases, our team were engaged when all appeared lost to the taxpayers ; leading us to wonder how many HMRC decisions have been accepted on the basis that they were seemingly impossible to challenge.
Ideally, specialist tax investigation advisers should be engaged at the earliest opportunity to avoid HMRC officers becoming entrenched in defending their initial conclusions. However these enquiries show that HMRC decisions are not always the right ones, even when all seems lost.