3 Mar 2020

Higher VAT penalties off the menu

202003 MHA Monahans VAT higher penalties off menu

Cases where HMRC allege that a restaurant hasn’t declared all of the takings are quite common. Generally, where these cases come before the Tax Tribunal, HMRC’s investigations are thorough enough for the Tribunal to agree that the taxpayer has not paid sufficient VAT.

HMRC then usually argue that the taxpayer has made a “deliberate error”. This enables them to both levy high penalties, and demand back tax for up to twenty years, rather than the usual four.

An allegation of deliberately bringing about a tax loss is a serious one, tantamount to an allegation of fraud. A recent case involving a restaurant, is a reminder that HMRC faces a high evidential burden to prove such an allegation.

The Tribunal agreed, on the evidence put forward by HMRC, that not all cash received from customers of the “Indian Voojan” was declared. The owner maintained that he was unaware of this, and he hadn’t knowingly submitted false returns. HMRC produced no evidence (e.g. that the proprietor was living beyond his declared means) that it was the proprietor, rather than say, a rogue member of his staff, who pocketed the cash and destroyed the meal slips of customers who paid in cash.

The Tribunal decided the proprietor had been careless, i.e. as the person in overall control he should have procedures in place to ensure all takings were recorded, and on that basis deserved some penalty.

But the severe penalty due where errors are made deliberately, requires HMRC to show that the proprietor knew that the VAT returns understated the takings, and in the Tribunal’s opinion they had failed to do this.

Unfortunately, the Tribunal didn’t then address the VAT periods which were more than four years old. In my opinion, if HMRC fail to show that the taxpayer made deliberate errors, they should be prevented from demanding VAT for older VAT periods. (Note: This taxpayer was VAT registered. If he had failed to register for VAT, the time limits for back tax could still be twenty years.)


The above case is a reminder that the burden of proof is on HMRC when contending that a penalty is due, and that appropriate evidence is required to justify the higher penalties.

Unfortunately, there is evidence of some HMRC Officers alleging that errors are deliberate, even where there should be no question of the taxpayer knowingly submitting an incorrect VAT return, claim or statement.

For example, where a taxpayer has taken a defendable filing position that HMRC don’t like, but without allegations of deliberate error, HMRC are out of time to raise an Assessment.

Taxpayers should not be intimidated into rushing to settle on receipt of Assessments and threats of large penalties, but should dispassionately review their case with the aid of experienced advisers.

For more information, contact Steve Chamberlain on 01225 818300 or send him an email