HMRC, Restaurants, VAT and Insolvency Practitioners

HMRC Gets Tough on ‘Tax Avoidance’ by Restaurants. £160,000 VAT owed and £50,000 fine for Kebab Shop.

In recent months, we have seen HMRC cracking down on tax defaulting by restaurants and takeaway food businesses. In some of the reported cases, restaurants have deliberately attempted to avoid or underpay tax. In others, as this case study shows, where HMRC assessed a small kebab shop chain for £160,000 of VAT owed, plus a £50,000 fine, the issue was over the distinction between hot and cold food and the difference in VAT treatment. Liquidation was the result, but the sooner insolvency practitioners are called in for help and advice over unaffordable tax liabilities, the more likely that liquidation is not the outcome.

Background to This Case Study Involving a Kebab Shop and Under Reported VAT

The business comprised 4 kebab shops and 1 warehouse. It had an annual turnover of £700,000, and had grown from 1 shop. All profits had been reinvested into growing the business over the 15 years of trade.

The problem first arose when HMRC queried the business’s treatment of VAT on its sales. This led to a detailed VAT audit, which took place in early 2016. The audit resulted in HMRC forming the view that that the business had massively under reported its zero VAT rated sales. As a result, they assessed the business for £160,000 of VAT owed, as well as a penalty of £50,000 for non-payment – c.30% of annual turnover.

As a general reminder, hot food is chargeable for VAT and cold food is not. Then there is the issue of takeaway or eat in. It can be quite complicated. It is not only SME businesses that have fallen foul of VAT on food.  We are aware of at least one individual franchisee of a major and household named fast food franchise having difficulties over VAT. In this case, they fell foul over whether a toastie should be considered as hot food, and was therefore VATable.

So, it is fair to feel a degree of sympathy for the kebab shop business, especially because the business could not afford to pay the unpaid VAT and the fine, and liquidation was the only option for the owner and manager of this business.

Our Insolvency Practitioners Worked on the Case

Had the business taken early professional advice, from an insolvency practitioner, such as Antony Batty & Co., the liquidation would probably have been avoided. However, when a liquidation is the only option, our aim is to preside over an orderly liquidation, save as many jobs as possible, and provide the best possible outcome to the creditors of the company.

In this case, the business and its assets were valued by an independent agent with suitable qualifications and standing, together with the relevant expertise and indemnity insurance. This led to the business (which was profitable – the VAT debt notwithstanding) and its assets being purchased by an associated company prior to the liquidation commencing. An insolvency practitioner from another firm was involved in the process up to the creditors’ meeting although she would not have been involved in the sale.

HMRC requested that representatives of Antony Batty and Company attend the creditors’ meeting, resulting in one of our insolvency practitioners, Tom Gardiner, being appointed by the majority creditor.

Tom fully reviewed the pre-appointment sale, and presided over the collection of the deferred sale consideration. So far, 10% of the monies owed to unsecured creditors have been paid and there will be a small final dividend once the process is complete. We always strive to return as much to the creditors as possible and to make these payments as quickly as possible.

Contact us for Help and Advice on Unaffordable Tax Liabilities

 This type of thing happens regularly, and, as in this case, the tax that HMRC demands, along with any fine, often leads to liquidation.  Failure, unfortunately, became inevitable when the size of the debt in relation to the business’s turnover meant that a time to pay arrangements was not possible.

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As insolvency practitioners, our focus, where possible, is just as much on turning businesses in difficulties around as it is on running liquidations. If it’s unaffordable tax liabilities you are worried about, we can help. Contact us or call us on 0208 088 0633 to arrange for a free initial consultation at our London or Essex office.

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