The running of a business can take its toll. From balancing finances, looking after staff, providing a good service and everything in-between, it is no wonder that thousands of business owners in the UK frequently experience high levels of stress!
That stress is multiplied tenfold when you are accused of running your business in an illegal manner, which is exactly what happened to a client we recently worked with.
Lisa’s Law recently handled a tax case that had been the bane of a business owner’s life for over three years. So much of his time and energy had been going towards sorting this issue out, that he felt he was losing control of his life.
For the purposes of this article, we will refer to the client as Arjun.
Details of the case:
Arjun is originally from India and owns a restaurant in the UK. The first time his restaurant was visited by the HMRC it was because they were accusing him of deliberately declaring less cash earnings in order to pay less tax on the revenue made by his business.
Investigators from the tax bureau found that the restaurant had deliberately not filed the cash revenues in the past tax years in order to escape the VAT, and the restaurant also had violations of Corporate Tax as a result of under-declared VAT sales.
As a result of this serious accusation, Arjun was looking at a huge bill to pay; over £100,000 worth of taxes, interest and penalties, plus HMRC legal costs that would need to be accounted for if left uncontested.
Arjun explained that part of the issue was that a former employee of his had been stealing cash and not running it through the register correctly, so it was hard for him to keep track of the exact cash income of his restaurant.
As you can understand, this left Arjun with a considerable burden on his shoulders, which is why he turned to our litigation team for help. Not only was he worried about the financial side of this issue, but even more so the criminal side of it, as he may be held liable for VAT and tax fraud after the HMRC claims for back payment. His immigration status and livelihood would be affected massively if he was accused of this crime.
Cash as a percentage of total income:
It is important to remember that the HMRC is interested in specifically the cash takings of the business in this case. The HRMC estimated that cash dealings amounted to around 25% of the total income of the restaurant. This amount was agreed to when Arjun was questioned by HRMC representatives which was under duress, as he was pressurised into answering the questions without legal or accounting advice.
Also, the HRMC saw that within the local area of Arjun’s restaurant, similar establishments take in around a 30% cash income as well, which they use in favour of their argument.
Lisa’s Law to the rescue:
This case had been dragging on for a few years and was really negatively impacting Arjun’s life; the stress of it was impacting on his mental health. He suffered from anxiety and depression. He lost interest in running his business and was not keen on building a future.
Arjun was recommended Lisa’s Law by a friend and we immediately set to work on establishing a couple of things that would work in his favour:
- Make it clear the Arjun did not deliberately fail to declare taxes.
- Reduce the percentage of cash income expected by the HRMC, meaning a decrease in the total of what Arjun must pay overall.
What we argued:
Firstly, we put forward that the initial estimate that both the HRMC and Arjun came to, in terms of the percentage of cash income generated by the business, of around 25%, was reached in speculative terms which were unfair to Arjun.
Arjun was not allowed to seek professional help from an accountant or law firm, and was subject to high pressure questions by the HRMC representatives. This meant that an important part of the case made against Arjun is actually invalid.
We argue that the cash income is actually much lower than 25% in the case of Arjun’s business.
To back up our claim, we referred to an official survey issued by UK Finance, the UK Payments Market Survey 2019.
Within this survey it is made clear that cash dealings within Arjun’s industry has declined in recent years, and that the 25% estimate made by the HRMC over a number of years is unrealistic.
This support from a credible third party helped us to convince the HRMC to reassess their cash percentage evaluation.
Deliberate or simply unaware?
Determining whether Arjun was deliberately not declaring the correct amount of income or if it was something he was unaware of is arguably the most vital part of this case. It dictates whether it is seen as criminal activity, or just simple careless. It also makes a vast difference in what Arjun will have to pay at the end of the case.
We put forward that because Arjun spends most of his time in the back of the restaurant preparing food, he was unable to properly supervise his staff. This led to one of his employees to begin stealing cash from the till. In turn, this led to incorrect amounts being submitted to the tax officials.
After presenting this evidence to the HRMC, they eventually conceded that Arjun was only guilty of ‘Failure to take Reasonable Care’ rather than planned tax evasion. This is a much better result for him in every way imaginable, and means he is not seen as a criminal in the eyes of the law.
Further to this, the tax bureau’s determination of Arjun’s cash income was eventually compromised at 18%, instead of the original 25%.
This meant that rather than paying over £100,000 in bills and damages, Arjun had to pay a far smaller amount of £30,000. This is also a sum that he felt he was able to pay. If he had not been able to meet this payment, he could have also negotiated a payment arrangement with HMRC through Lisa’s Law to spread his liabilities over a period of time. This would avoid bankruptcy for himself and his business. This is a resounding success for Arjun and for us here at Lisa’s Law!
What can we learn from this case?
In cases such as this often the main focus is to minimise the damage taken by the client, in terms of not only financial woes but reputational effects too.
Co-operation with the tax bureau is necessary, however clear and detailed evidence to support the client’s claims, and try to work out the best deal possible. This is especially important when trying to dissuade the HRMC from considering the case a criminal act or not. It is very likely that when demands are met and the client is no longer considered a criminal, the fees to be paid will be reduced. Being co-operative with HMRC is also important, as they will be more willing to consider the defence and work out a mutual resolution.
It is often very easy to make mistakes when doing your taxes, particularly in the hectic food industry. When a problem becomes apparent it is always best to face it head on with support from professionals.
The best way to do this is to have a rigorous bookkeeping system and always take care and time when sorting through taxes. As well as Lisa’s Law, we also have Lisa’s Accountancy who offer excellent professional advice when it comes to doing taxes correctly.
You can reach them on 020 7096 2722 or email them at firstname.lastname@example.org.
If you have any questions about this, or just want to have a chat about any legal issue whatsoever, please do not hesitate to get in contact with us on 020 7928 0276 or email in to email@example.com.
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