26 April 2022
In the recent case of Wuttinan Kotpat V HMRC at the First-tier Tribunal (FTT), the taxpayer (Mr Kotpat) appealed assessments levied on him in respect of understated profits, resulting from unreported sales for the tax years 2013/14 through to 2016/17, totalling over £63,000. Associated penalties for deliberate and concealed understatement of profits had also been levied on the taxpayer at a rate of 72.5 per cent on the underpaid tax, totalling over £6,000.
To determine whether sales had not been reported by Mr Kotpat, HMRC officers dined at the taxpayer’s Thai restaurant once in February 2016 and five more times in June 2016. In November 2016, HMRC opened an enquiry and requested information regarding the income and expenses of the business. HMRC found that when comparing their visits against the information provided by the taxpayer, there appeared to be a shortfall in reported sales.
Several meetings were held between Mr Kotpat, his agent and HMRC. In these meetings, Mr Kotpat gave contradictory statements, including that the restaurant was not open at lunchtime when HMRC officers had in fact visited the restaurant for lunchtime meals. He also initially confirmed that he had a second bank account, which income from the restaurant had been paid into, and then subsequently denied the existence of such an account.
HMRC had accessed information from the merchant payment processor (merchant acquirer) that the business appeared to have two bank accounts that card sales receipts were paid into. Mr Kotpat refuted HMRC’s assertion that the second bank account was used by him but could not fully explain various gaps in his records, including an apparent lack of income to support cash expenditure and expenditure from his main bank account included in his tax returns.
The judge found the case in HMRC’s favour, concluding that, ‘Mr Kotpat’s contention that there was no other business bank account [was] clearly not sustainable.’ In addition, she stated that she did not, ‘consider it inherently likely that the HMRC officers simply fabricated evidence as to the meals eaten’ as suggested by Mr Kotpat. The assessments and penalties were upheld in full and the taxpayer’s appeal was dismissed.
The taxpayer in this case was unable to provide supporting evidence to assure HMRC that there was no loss of tax. One of the interesting points is that whilst HMRC only provided limited evidence, the facts that were collated from various resources (including the merchant acquirer and HMRC’s trips to the restaurant) clearly showed a mismatch between the taxpayer’s tax return and the information he presented. One cannot help but wonder whether the taxpayer had appropriately considered the merits of taking the case to the Tribunal and the chances of success given the stack of evidence against him. HMRC has access to a vast range of information and this is used selectively, as appropriate, in these types of evidential cases, often to HMRC’s benefit.
The types of visits to hospitality businesses revealed in this case are conducted by HMRC officers relatively regularly, and it is likely that if HMRC asks questions about reported turnover, there is already evidence that suggests the numbers may not add up.
Taxpayers in this sector should seek advice when receiving enquiries, especially where test meals are cited. These enquiries can run on for a long time and be costly, in terms of tax, penalties, time and, in this example, court costs too. An inexpensive meal for an HMRC inspector can be anything but for restaurant owners.