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The case of Chisovalandis Georgiou v Revenue & Customs [2022] UKFTT 455 (TC) demonstrates how a taxpayer successfully set aside all HMRC tax assessments. HMRC was unsuccessful in preventing the taxpayer from appealing against a range of assessments, including a Personal Liability Notice. The Tax Tribunal suggested that HMRC failed to meet the evidential threshold and was critical of its approach. The Tribunal found that HMRC had based its assessments on a fundamentally flawed methodology, resulting in the dismissal of the majority of the charges against the company and its director, Mr Georgiou.
Background of the Case: Georgiou & Co Ltd, owned by Mr Georgiou, operated four fish and chip shops that accepted only cash payments. After an investigation by HMRC, the company faced several assessments, including a VAT assessment of £141,238 for undeclared output tax for nine quarters up to March 2016, a deliberate behaviour penalty amounting to £84,037, and corporation tax discovery assessments for three years ended 31 March 2016 totalling £230,647.40.
The company became insolvent and entered voluntary liquidation on 23 March 2018. The HMRC VAT enquiry began in January 2016, sparking additional assessments and determinations. Cash was a significant feature of the business, with all sales being cash transactions. Issues with the company’s tills resulted in record-keeping problems, leading HMRC to believe that takings had been suppressed, subsequently raising a VAT assessment.
The corporation tax assessments included sums due under the loans to participator rules and under-assessed profits. Additionally, Mr Georgiou faced a £64,885.32 personal liability notice in relation to the VAT penalty. However, this amount was later reduced to £47,857.76 to partially recognize that Mr Georgiou had not taken control of the business until April 2015, following his father’s death.
The Importance of Company Records: The HMRC enquiry began in January 2016, with the VAT assessment issued on 4 December 2017 and other tax assessments following shortly after. The judgment was handed down on 5 December 2022, five years after the VAT assessment was first raised. The business was a cash-only operation, emphasizing the importance of maintaining meticulous company records to address any concerns raised by HMRC quickly.
The case serves as a reminder that hindsight can be valuable; if the company had kept its records differently, it might have avoided some of the issues it faced. Unfortunately, despite the Tribunal finding that the taxpayer had acted properly, HMRC did not share this view, resulting in a five-year-long ordeal for the taxpayer.
HMRC Surveillance: As part of the tax enquiry, HMRC conducted surveillance of two fish and chip shops on two weeknights in November 2017, observing sales activities. The officer responsible for the VAT assessment admitted that it was based solely on the information gathered during these surveillance operations.
The Tribunal’s Critique of HMRC’s Methodology: The Tribunal was critical of HMRC’s methodology, noting several instances where HMRC’s assumptions and calculations were found to be flawed. The Tribunal found that HMRC had not taken into account several factors, including the different lengths of trading periods, the change in the number of operating shops, business issues arising from Mr Georgiou’s father’s death, and the exclusion of rental income from the bankings. Additionally, the Tribunal noted that the observations conducted by HMRC needed to be more reliable, and the absence of evidence from officers conducting the observations undermined the evidence derived from those occasions. The Tribunal concluded that the VAT assessment was not made to the best judgment and was therefore invalid.
Corporation Tax Penalties: Another HMRC officer dealt with corporation tax penalties, but the Tribunal found that HMRC had not proven deliberate behaviour by the taxpayer. The officer copied the reasons set out in the VAT penalty assessments and did not reach her conclusion on the matter.
Directors Loan Account Section 455 Tax Charge: HMRC suggested that Mr Georgiou, the company’s director, took around £1 million out of the company over four years without paying tax. However, the Tribunal dismissed this claim, stating that even if sales were undeclared, HMRC had not produced evidence that Mr Georgiou took the money for his personal use.
The Georgiou case serves as a lesson in the importance of maintaining accurate company records, especially in cash-only businesses. Furthermore, it highlights the burden of proof required by HMRC in tax assessment cases. Taxpayers facing similar situations should ensure they keep meticulous records and engage the services of experienced advisers to challenge any flawed assumptions or calculations made by HMRC.
If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.