HMRC's officers made five visits to a Chinese takeaway to confirm that not all the sales were recorded in the till leading to assessments for VAT and a s.455 Corporation Tax charge because the director was found to have pocketed the cash sales. 

Chinese takeaway

In Cheon Fat Limited v HMRC [2024] TC09094, HMRC officers bought meals for cash to assess the Appellant's operation. They did not request VAT receipts and then went back to the premises to make a VAT inspection.

  • HMRC made unannounced visits just before closing time to observe the cashing-up procedures and provide an accurate record of a night's takings. Analysis of the records showed that three of the five 'test eats' in May 2016 had not been recorded.
  • Concluding that cash sales were being suppressed, HMRC decided this was 'deliberate behaviour.'  
  • HMRC asserted the suppressed takings had been used for the benefit of the participants in the business and had not been correctly recorded in the directors' loan account. This led to a shortfall in Corporation Tax under s.455 Corporation Tax Act 2010.
  • HMRC raised Corporation Tax assessments for the five years to 31 March 2017, together with Penalty assessments. They also raised VAT assessments for each quarter from December 2012 to December 2016 together with Penalty assessments.
  • For the penalty assessments raised, HMRC gave full relief for 'helping and giving' but no mitigation for 'telling' because the Appellant had denied suppression of income throughout.
  • The taxpayer appealed to the FTT.

During the hearing HMRC acknowledged the Discovery assessment and associated penalties for the year to 31 March 2017 were not valid, so would not be defended.  They also acknowledged significant errors in calculations to arrive at the assessment of VAT and Corporation Tax for all years and invited the Tribunal to uphold some reduced assessments.

Concerning the suppression of takings, the First Tier Tribunal (FTT) found:

  • There was a lack of proper controls and inadequate record-keeping. It was impossible to conclude that the suppression of income was other than deliberate at approximately £2,000 per week. 
  • The Appellant had accepted that cash takings were not the 9% declared but of the order of 30-40% and the FTT used this as their starting point. The FTT extrapolated from the data presented and concluded that additional VAT due across the 18 VAT periods amounted to £76,626. That amount was to be allocated to VAT periods by applying a calculated factor to the declared sales in each prescribed accounting period.
  • The FTT found no evidence of staff theft which the Appellant had suggested as an explanation for the shortfall.  
  • HMRC explained they were not seeking to adjust overall profits. The FTT agreed with this approach.  The suppressed sales would be reflected in the VAT assessments only.
  • With regard to s.455, the FTT was told that where takings are suppressed, it is HMRC's practice to assume they have been extracted by the participants. 
  • The FTT dismissed the Appellant's argument that Mr Chan was not identified as the person in charge during the covert visits to make the s.455 charge was unreasonable.
  • It noted that no Corporation Tax charge is raised where suppression is a consequence of theft by someone who is not a participant. As there was no proof of any theft, the s.455 assessments should stand.

The appeal was allowed in part and HMRC were required to reduce their assessments by reference to the adjusted turnover computation made by the FTT.


Five visits to 'break the records'? Hopefully, the food was good! On a serious note, in these cases, HMRC has to make several visits to have a representative sample of data and make an assessment.

Useful guides on this topic

A beginner's guide to VAT
VAT: Where do I start? What is VAT? Who has to register for VAT? What rate should I charge? How do I calculate VAT? When are my VAT filing obligations?

Registering for VAT
When should a business register for and charge VAT? What are the VAT registration thresholds? What penalties might HMRC issue for late notification of registration? When do you need to file a VAT return?

Penalties (VAT)
When do penalties apply for VAT? What penalties are charged and how can they be mitigated?

Penalties: Errors in Returns and Documents: At a glance
What penalties apply for Errors in returns and documents? How are they calculated? When can they be reduced or suspended?

How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?

Grounds for Appeal: Amount
This guide covers your grounds for appeal against a penalty on the basis that the penalty is too high, miscalculated or if there are other reasons to warrant or request a reduction.

Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? Can HMRC issue two alternative assessments for the same period? What are your rights of appeal and defences?

Directors' loan accounts: Toolkit (subscribers)
HM Revenue & Customs (HMRC) have a director's loan accounts toolkit for advisers. This is our enhanced version with planning points.

External links

Cheon Fat Limited v HMRC [2024] TC09094