A restaurant company has partly succeeded in its appeal against VAT and Corporation Tax (CT) assessments and penalties raised by HM Revenue and Customs (HMRC), in a case which illustrates the importance of thorough record keeping.
The company operated a restaurant in a leisure and entertainment complex. HMRC considered that the company had suppressed sales and raised a VAT assessment for nearly £1.1 million, £948,000 of which related to undeclared sales and £149,000 to disallowed input VAT, as well as CT assessments of more than £2 million. Substantial VAT and CT penalties were also issued. The company appealed to the First-tier Tribunal (FTT).
As support for its contention that sales had been suppressed, HMRC pointed to the ratio of cash to card sales when they visited the premises in 2017 showing higher cash sales, the company's bank statements showing higher deposits than its gross sales, and discrepancies between the turnover in the accounts and the net outputs in the VAT returns. However, by 2017 the restaurant was being run by the son and nephew of the company's director, and had changed substantially since it had been owned by the company. The complex in which it was located had also changed. The FTT found that the ratio of cash to card sales from the 2017 inspection was not a reasonable comparison to deduce the ratio when the company had operated the restaurant. The FTT considered that differences between turnover and recorded outputs were due to chaotic record keeping and did not evidence deliberate suppression of sales. Any errors were careless rather than deliberate.
HMRC also claimed that the company had overstated zero-rated sales. The FTT found that while the company had likely made an honest attempt to claim the right amount of zero-rated output VAT, it had not proved that a higher figure than that contended for by HMRC was appropriate. The company's challenges to HMRC's refusals of input VAT deductions were also rejected, the FTT observing that it might have been able to provide evidence for some of its claims if proper records had been kept.
As there had been no suppression of sales, the amount of VAT subject to any penalty only related to zero rating and input VAT, and the CT penalties fell away. The FTT found that the company's behaviour with regard to input VAT and zero rating was careless rather than deliberate, and reduced the penalties accordingly.
It was subsequently noted that the fact that any errors were careless and not deliberate meant that, under Section 77(1) of the Value Added Tax Act 1994, any VAT assessments had to be made within four years. Most of the assessments were therefore out of time.
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