HMRC fines takeaway shops in tax evasion crackdown
- TBA
- Sep 6, 2024
- 4 min read
It is well known that there are many taxes for business operating in the UK. If you seek professional advice to plan your tax bill carefully, you can potentially reduce some of these costs. However, there are some businesses that choose to follow less legitimate routes…
HMRC recently launched a tax evasion crackdown on takeaway shops which were alleged to have altered their sales figures to lower their tax liability. What is going on?
1. What was alleged?
Many people have heard of restaurants only accepting cash in order to evade taxes. Recently, many more businesses have started using software known as ‘Electronic Sales Suppression’ (ESS) to manipulate their digital sales records.
HMRC caught wind of this and launched an investigation which has so far resulted in a raid of 17 takeaway shops across London, Ipswich, Manchester, and Newcastle.
ESS is a sophisticated software tool that can be installed on electronic sales systems. It allows businesses to manipulate sales transactions, enabling them to hide or ‘suppress’ part of their sales, thereby reducing their annual tax liabilities.
In many cases, ESS transfers a portion of the sales income to hidden bank accounts (sometimes offshore). The businesses then use the ESS tool to submit falsified tax returns to HMRC to evade taxes.
This method is particularly attractive for businesses with revenues approaching the VAT registration threshold or those with high annual profits. When someone pays by credit card for food, the transaction might seem normal. However, using the ESS tool, the restaurant can covertly delete sales records and link them to local or overseas payment platforms to manipulate the records.
2. HMRC’s response
HMRC has collected detailed information on multiple ESS providers and have obtained customer lists from these providers.
During the recent raids, HMRC officials visited one takeaway in Manchester, one in Ipswich, eight restaurants in London, and seven locations in Newcastle. They found that the chip and PIN machines had been tampered with, and immediately seized the suspected devices.
In Manchester, a 47-year-old man was arrested. He admitted to using the software to evade income tax, VAT, and possibly engaging in money laundering.
Additionally, four takeaway owners in Cheshire voluntarily requested meetings to confess to using the software while operating without VAT registration.
3. What happened after?
HMRC’s stance is clear: using ESS is illegal tax evasion. Businesses found with this software face an initial fixed penalty of up to £1,000. Depending on the severity of the fraud, further fines of up to £75 per day can be imposed.
Additionally, HMRC warns that using ESS can lead to penalties for failing to notify about VAT registration, as well as fines for offshore non-compliance and underpayment of corporation tax, income tax, and VAT (if applicable).
Suppliers of ESS software face much higher fines—up to £50,000 per instance of manufacturing, distributing, or promoting the tool, with severe cases leading to imprisonment.
This investigation covers only a small fraction of the affected businesses. HMRC has issued notices to hundreds of takeaway shops, urging restaurant owners to voluntarily disclose information. Since these letters were sent, over 50 businesses have voluntarily disclosed information, but many more are suspected of using ESS to deceive the state.
HMRC encourages citizens to report any ESS or tax fraud online.
4. What is tax evasion?
Tax evasion is a serious criminal offense. It involves deliberately and dishonestly not paying the taxes owed to HMRC.
Anyone who deliberately conceals information or fails to declare taxable income or gains may be charged with tax evasion.
Here are some common examples of tax evasion:
Failing to declare taxable trading income: Deliberately hiding trading income or not submitting tax returns
Missing trader fraud/carousel fraud: Importing goods VAT-free, selling them with VAT, then not reporting the VAT collected to HMRC
Declaring tax-exempt expenses: Misusing funds that qualify for tax relief, such as film production or eco-forest expenses
False invoices/personal expense claims: Common in the construction industry, submitting non-existent or personal expenses to evade taxes
Import goods: Not declaring or underreporting the value of imported goods to evade import duties
Cash or cryptocurrency transactions: Avoiding traceable transaction records to evade income or gains taxes
False identity: Using someone else’s identity for taxable transactions, retaining the proceeds, then disappearing. If identity theft occurs, the victim may be liable for the taxes
Tax avoidance schemes: Complex transaction structures to save on taxes, often leading to higher long-term costs and being deemed tax evasion by HMRC
5. Penalties for tax evasion
Tax evasion can result in heavy fines, with the most severe penalties leading to imprisonment. The penalties vary, but examples include:
Tax evasion: Up to 6 months in jail or a £5,000 fine for summary convictions. The maximum penalty for tax evasion in the UK is 7 years in prison or unlimited fines
Public revenue fraud: The highest penalty in the UK is life imprisonment or unlimited fines
Providing false documents to HMRC: Fines up to £20,000 or up to 6 months in jail
Smuggling (tax evasion): Fines up to £20,000. For criminal court cases, up to 7 years in prison or unlimited fines
If HMRC is investigating your tax evasion, you will receive a notification letter.
6. Some advice from TB Accountants
If your tax returns are inconsistent or your accounts show suspicious activities, HMRC’s anti-fraud team will use their advanced ‘Connect’ database to investigate. This database collects information from applications like Apple, Amazon, and Airbnb to identify tax evaders.
Additionally, HMRC collaborates with other investigative and law enforcement agencies to catch tax evaders. For offshore tax evasion, HMRC works with international law enforcement to track UK citizens who illegally transfer funds abroad to evade taxes.
Regarding ESS, HMRC can identify suspected businesses by comparing third-party data from bank accounts and online order platforms with reported amounts on tax returns. Using ESS to control and hide sales is a criminal offense.
While HMRC’s penalties have been relatively lenient so far, severe cases can lead to criminal investigations, penalties, or even imprisonment, potentially barring you from conducting related businesses for life. Voluntary disclosure may result in lighter penalties. Anyone with information related to ESS usage should contact HMRC online.