Mark McLaughlin warns business owners to be mindful of potential covert operations by HMRC officers in enquiries and investigations.
‘Cash is King’ is a well-known saying, albeit increasingly dated, in this age of cashless payment methods. Nevertheless, for many businesses, cash remains an important means of receiving payment for goods and services.
HM Revenue and Customs (HMRC) seemingly pays close attention to cash-based businesses due to the potential for undeclared cash payments. However, it can be very difficult for HMRC to detect the small minority of dishonest business owners. Consequently, HMRC officers may disguise themselves as customers to catch business owners red-handed.
Out for a meal
For example, in Kotpat v Revenue and Customs [2022] UKFTT 117 (TC), the taxpayer operated a Thai restaurant as a sole trader. HMRC officers conducted a ‘test meal’ at the restaurant in February 2016. HMRC subsequently opened enquiries into the taxpayer’s tax returns for 2014/15 and 2015/16. In a meeting between HMRC, the taxpayer and his advisers, HMRC advised they had established that the test meal in February 2016 had not been included in the records for that day. HMRC also advised of five other test meals during June 2016, of which only two appeared in the records. On 16 June 2016, HMRC officers paid for a meal in cash but the records for the day showed only card transactions. On 25 June 2016, another meal had been paid for in cash, but again the records showed only card transactions.
Furthermore, HMRC’s enquiries concluded that the taxpayer had failed to declare takings paid into a second bank account. HMRC issued a discovery assessment for 2013/14, and closure notices for 2014/15, 2015/16 and 2016/17. The taxpayer appealed. The First-tier Tribunal (FTT) found, based on the evidence, the taxpayer’s contention that there was no other business bank account “clearly not sustainable”; as stated by the taxpayer at the meeting with HMRC (albeit subsequently denied), the business had access to a second bank account.
As to the taxpayer’s cash takings, the FTT found that HMRC’s test meal purchases were not recorded and that the cash takings were understated in 2014/15. The FTT also found that the principle of ‘presumption of continuity’ (following Jonas v Bamford [1973] STC 519) could reasonably be considered to apply. Finally, HMRC raised a penalty for the tax return inaccuracies. The FTT upheld the penalties charged by HMRC, finding that the behaviour which led to the understatement of tax could not be anything other than deliberate. The taxpayer’s appeal was dismissed.
Under scrutiny
Unfortunately, even taxpayers who record every penny of cash takings are not without risk of challenge. HMRC guidance instructs its officers as follows (at EM3655):
‘You have reason to test the adequacy of the recorded figure of drawings if the drawings are wholly or partly a balancing figure in the supporting accounts, or if the business records are shown to be unreliable, or if in the course of your enquiry you have, for example, established other undisclosed savings, or a generally unsatisfactory capital position.’
In addition, HMRC may consider whether the nature of the business is such that there are opportunities for unrecorded cash transactions in deciding how deep to delve into the business owner’s tax affairs.
Practical tip
Cash-based businesses are arguably a soft target for HMRC. However, taxpayers have achieved some success in challenging HMRC assessments of additional business profits before the FTT (e.g., Chapman v HMRC [2011] UKFTT 756 (TC), Newell t/a Tanya’s Takeaway v HMRC [2013] UKFTT 742 (TC) and Bekoe v HMRC [2017] UKFTT 772 (TC)). In practice, taxpayers can reduce the risk of additional tax, interest and penalties by keeping reliable, robust records and not mixing business and private transactions in the same bank account.
