VAT & Underdeclared Sales

The recent First-tier Tribunal decision in Massala Exotic Ltd (MEL) v HMRC is a cautionary tale for business owners about the importance of accurate VAT reporting and the personal risks directors face when things go wrong. The case centred on an Indian restaurant, MEL, and its director, Mr Khosru Miah, who found themselves facing a hefty VAT assessment, a significant penalty, and a personal liability notice (PLN).

The trouble began when HMRC compared the restaurant’s declared sales with card payment data from merchant acquirers. The numbers didn’t add up: card sales were much higher than what the company had reported in its VAT returns. Using the proportion of card sales observed during an unannounced visit, HMRC estimated the restaurant’s total sales and issued a VAT assessment of nearly £281,000, covering a period of years.

The company argued that some of the card machines and bank accounts were used by relatives’ businesses, not MEL. However, the Tribunal was unconvinced. The evidence was largely hearsay, and neither the director nor his relatives attended to give oral evidence. The Tribunal concluded that the company hadn’t shown the assessment was excessive and accepted HMRC’s approach as fair and reasonable - meeting the “best judgement” standard required by law.

Things got worse for Mr Miah. HMRC imposed a penalty of 63% of the VAT assessed, on the basis that the underdeclaration was deliberate. The Tribunal agreed, finding that Mr Miah had knowingly provided false sales figures to the company’s accountant, which were then used in the VAT returns. This wasn’t a careless mistake - it was a sustained, intentional act.

To top it off, HMRC issued a PLN to Mr Miah, making him personally responsible for the penalty. The Tribunal confirmed that a PLN can be issued to a company officer if the penalty is for deliberate inaccuracy attributable to them - insolvency of the company isn’t required.

The case is a stark reminder: HMRC has wide powers to estimate VAT liabilities and pursue individuals where deliberate wrongdoing is involved. Directors can’t hide behind the corporate veil if they’re personally responsible for tax misstatements.

For business owners, the message is clear - keep accurate records, declare all sales, and take VAT compliance seriously. The risks of getting it wrong are simply too high.