​Cheon Fat's Sales Suppression Battle with HMRC

Cheon Fat Limited, the operator of The Wok Inn, recently confronted HMRC in a first-tier tribunal (FTT) to dispute VAT and corporation tax assessments under section 455 of the Corporation Tax Act 2010. Over a period of time, in 2016 and one day in 2017, HMRC agents conducted secret dining experiences and unannounced inspections at the restaurant to verify record accuracy. This covert operation revealed a pattern of under-reporting sales figures, prompting HMRC to issue a substantial tax and VAT assessment totalling £384,136.75 and penalties amounting to £156,415.41.

In its defence, Cheon Fat Limited argued that HMRC overestimated the extent of under-reporting and contended that its actions were not deliberate, appealing for a greater reduction in penalties due to cooperation. The tribunal acknowledged flaws in HMRC's evidence handling and calculations, particularly regarding the taxpayer's cash sales, which, after thorough examination, were found to be significantly under-reported, contrary to earlier claims of only representing a small fraction of total sales.

Despite identifying errors in HMRC's methodology - such as reliance on incomplete data for card sales estimations - the tribunal ultimately upheld the assessments for exceeding four years, emphasising deliberate under-reporting by the taxpayer. The FTT adjusted the VAT assessed, reducing it to £76,626, and left further adjustments to HMRC.

The ruling highlighted the taxpayer's limited success in reducing the financial impact of the assessments. It underscored that a more forthcoming approach during the investigation might have yielded a more favourable penalty reduction.

We invite your thoughts on this matter. How do you perceive the balance between rigorous tax enforcement and taxpayers' rights?