Sector: Service Sector – French Restaurant and Patisserie
Staff: 20 Staff
Problem: HMRC Invigilation following disclosure with demand for back assessment of £98,000
Date: March 2012
Solution: Company Voluntary Arrangement
“We had taken, what at the time, seemed the easier road to try and stay competitive and maintain cash flows.
“Under-reporting VAT seemed to be the easiest option at the time. But once we were notified of the audit, and thought through the consequences, we panicked. I thought I would be prosecuted by HMRC for fraud.
“I am very grateful for the support from 4R. For giving us the courage to come clean, disclose the debt, and then arranging a CVA to manage the process.”
In March 2012 the bookkeeper and accountant of a French Restaurant and Patisserie contacted 4R Business Recovery to assist the directors with a proposed invigilation visit by HMRC.
Following the downturn in the economy in 2008, the director, in an attempt to compete on the high street, lowered prices and compensated for the loss of income by diverting cash payments through a separate till. Instigating phantom EPOS systems to deliberately under-report the VAT due to HMRC.
The directors had falsified VAT returns and significantly under-reported VAT debts owed to HMRC. With an invigilation audit due in the next 10 days, the directors were aware that the EPOS system could potentially reveal the fraud and now wanted to understand how the problem could be managed.
Given the serious nature of the problem and the urgency of the audit date, 4R Business Recovery arranged to meet the director and his wife the following day. The first meeting lasted some 4 hours as we completed a full fact-find. The next day we arranged for a trusted partner, 360 Finance (a specialist in VAT audits and compliance), to undertake a full compliance audit. 360 Finance identified the deficit accurately at £98,000 in total.
We produced a full disclosure document, using HMRC’s own “Code of Practice 9”, and the Contractual Disclosure Facility or CDF protocols. We negotiated unprompted disclosure and reported to HMRC the under-reported VAT debts, which would now be subject to civil debt recovery action. By encouraging the directors to be open and transparent, criminal proceedings were avoided.
It was fortunate that the directors did disclose, as HMRC had already obtained covert evidence of cash being handled through specific tills and general sales activity. The invigilation audit would have uncovered the fraudulent practices, but as an undisclosed fraud, the director would have faced criminal prosecution.
4R Business Recovery was able to demonstrate the company was viable, that the directors had over 30 years track record of good tax compliance and that the enterprise had generated significant revenues for the exchequer. The tax fraud was a result of extreme commercial pressure on the directors, who openly admitted poor judgment, which was completely out of character as demonstrated over the last 30 years. As such HMRC would consider a Company Voluntary Arrangement or CVA to manage the debt owed.
4R Business Recovery completed a full CVA proposal with profit, loss and cash flow forecasts. Again, a well-written proposal with supporting evidence is critical when a company has “non-standard” compliance issues.
As a result of the recent disclosure agreement or CDF the proposal offered creditors repayment of 100p in the pound, this was accepted by HMRC and the other creditors.