Tax prosecution investigations flawed and tax losses overstated

HM Revenue and Customs (“HMRC”) have and still are undertaking investigation campaigns targeting various types of businesses that they suspect have failed to declare or under-declared their business income/profits, typically where there may be an element of cash takings. This has resulted in us seeing a noticeable increase in criminal prosecutions we assist defendants challenged. 

As forensic accountants with extensive experience of both criminal prosecutions and civil investigations we have assisted with successfully challenging HMRC allegations of tax fraud.

Specifically, in relation to restaurants and takeaways we have found that HMRC have adopted a standard approach in how they have identified:

  • the failure to be VAT-registered and its start date.
  • the level of undeclared sales income, with the related VAT under-declaration.
  • the allowance made for any costs on which Input VAT would have been suffered and so deducted from the VAT loss amount.
  • were a trading profit has been calculated to estimate the Corporation/Income Tax loss, how costs have been quantified.

Quite often no or very little allowance has been given for costs on the basis that HMRC do not have the records to identify them. However, we have found that within the records held by HMRC there is information on costs that should have been identified and the Defendant when prompted can provide additional information.

Where information on costs is not available, but some would clearly have been incurred for the business to operate e.g. food and drink costs, wages, rent, power and water, then it can be possible to calculate estimates using comparators for similar businesses. On this basis alternative calculations of the VAT loss, profits made and the related corporation/income tax losses can be made.

Main issues to consider

Amongst the many issues to consider are:

  • Is there actually a tax loss to HMRC?
  • When should the business have been VAT-registered?
  • Has there been a transfer of ownership / sale of a going concern that affects the possible VAT registration date?
  • How have sales been identified? e.g. business records, internet sale portals (Hungry House / Just-Eat) or credit/debit card company records.
  • On what basis has any estimation for cash sales been made, and what records relied on?
  • Have any costs been identified (direct costs and overheads), and if so from what records?
  • Has any deduction been given in the VAT calculation for Input VAT suffered on costs?
  • If a profit calculation has been made does this fairly reflect the costs suffered?

In our opinion HMRC’s approach is quite often flawed and its allegations are based on an insufficient consideration of the particular circumstances of a business, and the available information, resulting in incorrect charges and / or significantly overstated estimates of the tax loss.


Challenging HMRC’s approach has resulted in:

  • Not guilty verdict on a VAT fraud charge.
  • Significant reductions in the tax loss, resulting in a suspended sentence.
  • The reduced tax loss flowing through to a lower benefit amount claimed in subsequent Proceeds of Crime proceedings.

HMRC's charter promises an accurate and even-handed approach and we would hope given their extensive resources and knowledge they could be relied upon to get these cases right, the reality is that they do not, and this can significantly impact on seeing justice done and the lives of the defendants.