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March's round up of the latest tax investigation news and cases:
A restaurant owner in Worthing has failed in his attempt to overturn a £60,463.39 HMRC demand for unpaid VAT penalties, after the First Tier Tribunal (FTT) ruled that his five-year delay in appealing was unjustifiable.
Tenzing Lama, the sole shareholder of the Nepalese restaurant Gorkha in Worthing, lived with his family in a flat above the business until the premises were destroyed by fire in 2018. Lama's appeal centered on multiple tax penalties issued through personal liability notices (PLNs) from HMRC dating back to 2016.
Lama claimed he had ignored the tax demands and penalties because he believed they were no longer applicable after his business was destroyed in the fire.
The tax dispute originated following three unannounced visits by HMRC in 2016 to observe Lama's restaurant operations and verify that all sales were being properly recorded through the tills.
On 29 March 2017, HMRC requested information to verify Gorkha's VAT position. When the company failed to provide this information, HMRC issued a formal information notice under Schedule 36 Finance Act 2008 on 3 May 2017.
After penalties for non-compliance were issued on 9 June 2017, the company provided some of the requested information on 12 July 2017.
On 12 October 2017, HMRC wrote to Lama alleging that sales, particularly cash takings, had been understated. Their key findings included:
HMRC informed Lama they would issue assessments to recover the allegedly underpaid VAT and corporation tax, and would consider additional penalties.
On 13 June 2018, HMRC issued VAT assessments for £61,963 and a discovery assessment for £45,959 for additional corporation tax. When Lama did not appeal these assessments, HMRC issued a corporation tax penalty of £26,737.11 "on the basis of deliberate behaviour" on 8 August.
On 27 August 2018, a devastating fire destroyed the Gorkha restaurant and flat above. Lama and his family lost their business, home, and personal possessions, forcing them to relocate to another property in Worthing owned by Mrs. Lama.
HMRC sent a second corporation tax penalty notice to Lama's registered office address with a copy to his accountant. In October, they sent a second VAT penalty demand before learning that the company had ceased trading in November and had been deregistered from VAT.
Despite continued correspondence from HMRC outlining the 30-day appeal process, Lama did not respond. In June 2019, HMRC's targeted enforcement recovery unit (TERU) escalated their demand for payment of £60,463.39, warning that "failure to pay could result in court action, seizure of goods or bankruptcy."
During a telephone conversation with an HMRC officer on 10 March 2021, Lama stated he was still involved with the company, though he had resigned as a director in 2017.
A bankruptcy hearing was scheduled for 4 October 2023. Subsequently, Lama's new accountant, John Griffin of Trident Tax Limited, filed an appeal against the PLNs on 24 January 2024, requesting permission for a late appeal—over five and a half years after HMRC issued the first demands.
The tribunal noted the 61-month delay for the corporation tax appeal and 62-month delay for the VAT appeal were "significant and serious."
Griffin argued that Lama "mistakenly thought that the underlying corporation tax and VAT liabilities of the company would no longer be due because the company's business had been forced to close as a result of the fire. He also thought that the penalties would therefore fall away."
Tribunal Judge Marilyn McKeever rejected this argument, stating: "Even if Mr Lama had thought that was the case before March 2019, it is not credible that he continued to hold that opinion," given the ongoing HMRC communications and bankruptcy threat.
While Griffin also claimed his client was "in no fit condition psychologically or emotionally to address or consider the company's tax obligations," the tribunal noted Lama had filed accounts with Companies House "soon after the fire."
Judge McKeever expressed sympathy for Lama but noted no medical evidence supported the delay justification. When Griffin revealed Lama had retrained as an accountant, the judge remarked: "If Mr Lama was capable of studying for an accountancy qualification, I consider that he must have been capable of dealing with his own tax matters."
HMRC's solicitor Siobhan Brown argued that Lama's "substantive case was weak."
Despite Griffin's contention that Lama would be denied access to justice if the appeal was refused, the tribunal ruled against him.
Judge McKeever concluded: "I do not consider that Mr Lama's case is particularly strong. Having taken account of all the circumstances and carried out the required balancing exercise, I have decided to refuse permission to make a late appeal."
The judge noted that HMRC could potentially mitigate the penalty under section 102 Taxes Management Act (TMA) "in the light of the real hardship that payment would cause," but emphasized that "the exercise of HMRC's discretion is not within the jurisdiction of this tribunal."
Changes to IR35 off-payroll working rules affected 120,000 contractors and raised an additional £4.2bn in tax in just four years.
HMRC figures reveal that the clampdown on IR35 has generated approximately £4.2bn in additional tax, National Insurance contributions (NICs), and apprenticeship levy payments, with affected individuals paying an average of £10,000 more in tax. The reforms initially impacted the public sector from April 2017, before extending to the private sector from April 2021.
In its second report examining the impact of the changes and the use of personal service companies (PSCs), HMRC noted that contractors' take-home pay decreased because "those PSCs and their workers who changed payrolls around the time of the reform tended to have above average earnings compared to the whole of the UK population."
However, HMRC cautioned: "This interpretation of some workers seeing minimal changes to take-home pay should be treated with caution, as there are several reasons why some workers may have seen a reduction in take home pay due to factors that we cannot observe from available data."
This reduction was attributed to individuals reporting "lower profits before the reform due to the ability to claim allowable deductions which may no longer be available once the worker has changed how they provide their services." Additionally, HMRC indicated that estimates for the average tax paid could be lower than the actual tax take.
Between October 2019 and March 2023, HMRC reported that tax revenue increased by £4.2bn, with the highest-yielding year being 2019-20, which generated £1.9bn due to payment of higher PAYE taxes in that tax year and corporation tax related to previous years.
Following the 2021 reforms, which were designed to reduce the use of IR35 and compel companies to hire contractors on the payroll, fewer personal service companies were established. HMRC estimated that there were 45,000 fewer new PSCs between April 2021 and March 2022 than what was predicted based on previous trends.
In total, HMRC estimated that 280,000 individuals moved from being paid through PSCs between October 2019 and March 2022, including those who transferred to PAYE employee status. An estimated 40% of these individuals moved solely because of the reform, HMRC said, however, "other events" such as the pandemic may have also had an impact.
Of those who opted out of using PSCs, 96% then either became employees of the organisation they were contracted by:
Along with these workers, HMRC reported that 0.5% (1,400) moved to companies which offered disguised remuneration schemes between 2019 and 2022, noting that "there will be some overlap between this population and those who have moved to umbrella organisations."
Disguised remuneration schemes were identified as an ongoing problem for HMRC, which continues to tackle both promoters and scheme users.
The contractors most affected by the changes were those working in the IT, professional and scientific sectors, which includes legal activities, accounting and bookkeeping, architectural and engineering activities, advertising and market research, and several more.
HMRC added that up to 1.5m people may have been working through a PSC at some point between 2015 and 2022. While the IT sector was the most prolific user, several other sectors were impacted, including:
A construction boss who had financial control of four companies despite not being a director has been jailed after siphoning off £700,000 to fund his gambling habit.
Wesley Grainger-Smith, 66, from Winthorpe, Nottinghamshire, has been sentenced to two years and five months' imprisonment after transferring £702,050 from the bank accounts of four construction companies to his personal casino gaming account between 2014 and 2017.
Grainger-Smith, who pleaded guilty to five counts of fraudulently removing company property, was sentenced at Lincoln Crown Court on 28 February. While acting as a shadow director, he would later deposit his gambling winnings back into the businesses.
At the time of the offenses, Grainger-Smith was officially listed on Companies House as the director of only one of the businesses, Smiths Construction Services Ltd. However, according to the Insolvency Service, he effectively acted as a director at the other three companies and had significant influence over their affairs.
Relatives of Grainger-Smith were also directors of several of the companies under his influence.
The Insolvency Service investigation uncovered almost £570,000 in cash deposits to the company bank accounts, which investigators believe was the money Grainger-Smith paid back to the businesses after gambling with company funds.
Shortly after Grainger-Smith transferred money from the company bank accounts, all four construction firms ended up being wound up by the Insolvency Service. Grainger-Smith himself was declared bankrupt in March 2017.
The systematic pattern of fraud across the four companies followed a clear timeline:
This was not Grainger-Smith's first encounter with business misconduct penalties. In 2017, he was banned from acting as a company director for five years over his misconduct at Eagleport. He received an additional 10-year ban in 2019 for misconduct at Smiths Construction Specialists.
Mark Stephens, chief investigator at the Insolvency Service, said: "Wesley Grainger-Smith removed vast sums of money from failing companies to fund his gambling at casinos.
"He cannot have thought he was entitled to recklessly gamble with company money, or that he was acting in the best interests of the four companies where he said he acted as a consultant.
"Directors, or those acting as directors such as Grainger-Smith, will continue to be prosecuted by the Insolvency Service if they deliberately and fraudulently put money out of the reach of creditors."
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