Every business owner should know that lax bookkeeping can land you in deep water with the tax authorities. However, in one case, a chip shop proprietor argued that HM Revenue and Customs (HMRC) got its sums wrong and succeeded in overturning back-tax demands and penalties totalling more than £50,000.
The man had been in the fish and chips trade for more than 30 years and admitted that he had rather old-fashioned bookkeeping methods and did not keep all the till rolls that he should have done. Following a spot check, HMRC calculated that he had underpaid more than £26,000 in VAT over a six-year period. He was also hit with penalties totalling over £25,000 on the basis that he had deliberately concealed and knowingly understated his business’s turnover.
In allowing the sole trader’s appeal and overturning all those financial orders, the First-tier Tribunal noted that tax officials had estimated the profit margins of the business at 68 per cent, although fish and chip shops generally achieve less than 60 per cent. HMRC’s calculations were not capricious or arbitrary; however, the figures arrived at were likely to be substantial overestimates and did not represent best judgment within the meaning of the Value Added Tax Act 1994.