inTAX successfully resolves VAT investigation for client

In late 2016, HM Revenue & Customs (HMRC) conducted an unannounced VAT visit to a chain of convenience stores.

The investigation began as a review of whether VAT was being correctly applied to the supply of alcohol, but it developed into a cross-tax enquiry and HMRC’s examination of electronic till data from each of the stores.

Almost nine years on, we have successfully negotiated HMRC’s demand for £4.5 million down to a contract settlement of £155,000.

Background to the VAT investigation

The Director owned and managed a number of successful convenience stores, selling everything from sweets to premium bottles of alcohol.

In 2016, HMRC visited one of the stores unannounced to conduct a stocktake of the alcohol on hand, focusing primarily on beer.

VAT visits like this are common.

However, the unannounced nature of the visit indicated that HMRC was acting on information and a suspicion that there were inaccuracies in the company’s tax returns.

Six months later, HMRC visited again – this time with a data handler who extracted electronic data directly from each of the tills.

At this point, the company was being represented in the VAT investigation by its day-to-day accountant.

When HMRC requested information, the accountant provided it.

It was not until HMRC issued a pre-assessment letter in late 2017, outlining the amount of tax HMRC believed was due, that inTAX were engaged as specialist tax advisers to resolve the dispute.

Electronic till data

HMRC can require a company to provide electronic till data by serving a formal Information Notice (a Schedule 36 Notice).

HMRC must be able to demonstrate that the information requested is reasonably required to check a tax position.

In this case, HMRC did not issue an Information Notice.

Instead, HMRC requested the information on a voluntary basis.

This meant the business could have challenged the request, if it felt it was excessive.

HMRC’s concerns could have been addressed by providing explanations and alternative information, such as additional invoices, receipts, and bank statements.

This case study explains how providing excessive information resulted in an eight-year VAT investigation about whether till data could be relied upon to prepare accurate business records.

Whenever HMRC requests information or documents, it is important to carefully consider the request before responding.

HMRC assessments during the VAT investigation

Having obtained and interrogated the till data, HMRC believed it had identified a significant under-declaration of sales, leading to both an underpayment of Output VAT on the additional sales and an underpayment of Corporation Tax on the additional profits.

HMRC issued assessments and deliberate penalties totalling £4.5 million after applying a “suppression rate” based on a sample period for just one store.

We appealed the tax assessments and argued that the till data HMRC had based their figures on was not reliable:

• The business had kept a log of calls with the till software provider, reporting problems that the tills were not recording sales properly
• The business had CCTV evidence showing staff stealing from the tills and staff processing transactions that did not take place

Despite providing significant evidence, over many years, to dispute HMRC’s assessments, HMRC refused to accept that the till data was unreliable.

The case was proceeding towards a hearing at the Tax Tribunal.

An alternative approach to resolving a VAT investigation

After appeals were made to the Tax Tribunal, we continued to try and reach an agreement with HMRC – resolving tax disputes outside of litigation is often the most effective approach in terms of costs, time and stress.

We maintained that HMRC’s additional sales figure was excessive, but rather than attempting to reason with HMRC regarding the till data, we tried a different strategy.

We applied HMRC’s “suppression rate” to produce revised turnover and profit figures for all of the stores.

We demonstrated that HMRC’s figures produced a Gross Profit Ratio (“GPR”) of over 70 per cent.

We obtained data relating to the GPR for comparable stores and were able to show that HMRC’s figures would have made the stores 200 per cent more profitable than the most successful stores in the area.

Outcome of the VAT investigation

HMRC eventually accepted that their assessed figures could not be correct.

We convinced HMRC that there must have been additional purchases in order to arrive at a realistic GPR figure.

HMRC allowed for additional purchases which reduced the VAT assessment and Corporation Tax assessment.

We also demonstrated that HMRC did not have any evidence of VAT fraud.

HMRC agreed that the company’s behaviour was only careless and HMRC cancelled the deliberate penalty.

We also persuaded HMRC that all penalties should be suspended, subject to conditions being met.

We agreed an overall settlement for £155,000 – down from HMRC’s initial position of £4.5 million.

Reflections on dealing with a VAT investigation

This case highlights the importance of instructing a tax specialist experienced in VAT investigations and disputes at the earliest opportunity – be it at the start of an HMRC investigation or following a request for information.

Although we were able to achieve a great result for our client on this occasion, providing HMRC with information without considering whether it is reasonably required can often lead to VAT investigations lasting longer than necessary, incurring additional costs and stress.

If you’re worried about a HMRC visit, VAT investigation or HMRC has requested information, please speak to our experts at the earliest opportunity.

You can get in touch with our friendly and experienced team on: 020 3137 7914 or email liam.chalmers@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.