October 2022 Tax Investigation Round Up

October's round up of the latest tax investigation news and cases:

• HMRC trying to claim back unpaid tax from 4,000 taxi drivers
• OnlyFans ordered to pay £11m VAT bill
• Chinese takeaway loses appeal against £50k tax dispute

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HMRC trying to claim back unpaid tax from 4,000 taxi drivers

Following recent registration requirements, HMRC is chasing more than 4,000 taxi drivers for unpaid tax. On April 4, 2022, new tax checks were required on licensed and private hire vehicles. When renewing their licences in England and Wales these checks are required.

Checks are to confirm whether a driver is registered for tax on their taxi income. Since setting up the new requirement, HMRC has discovered thousands of drivers who remain unregistered. These usually operate under booking apps such as Uber, Ola and Bolt.

Letters were recently sent out to taxi drivers on 5 September that have undeclared tax or failed to declare their income correctly. They have been given the standard 30 days to respond or will undergo further investigation.

Steve McNamara, general secretary at the Licensed Taxi Drivers Association (LTDA), stated: ‘The revenue has been missing out on tens of thousands (of pounds) of income for years.’

The Financial Times wrote that the tax authority said the lost tax was from taxi drivers working on booking apps. It also revealed that the letters were ‘being sent to people who have earned money from driving customers who booked private hire cars through online driving applications’.

The Public Carriage Office (PCO) currently issues a licence for three years. Drivers must, when applying for this, confirm that they understand that they are responsible for their tax, needing to carry out tax checks by themselves or by an advisor. Tax codes are then offered and given to the licensing authority.

HMRC  has worked with licensing bodies to make people aware of the changes, and offer any support to those who have been affected.

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OnlyFans ordered to pay £11m VAT bill

The European Court of Justice has ordered OnlyFans, the adult online platform, that it will have to pay VAT after investigating a bill for £11m on subscription fees.

The owner of the adult platform, Fenix, disputed the VAT bill in 2020 at the First Tier Tribunal.  This was after HMRC ordered it to pay VAT on subscription fees as well as the 20% charged on content from creators.

The European Court of Justice has agreed that Fenix is liable for VAT subscription sales and the case has now been returned to the UK First Tier Tribunal for a decision.

The amount of unpaid tax totaled to £11,238,478 covering the years from 2017 to 2020. HMRC viewed that Fenix should be acting under his own name under Article 9a of the VAT Directive. This article states that the liability and the burden of taxation is the responsibility of the internet platforms.

The company in contrast argued that it was only required to pay VAT on the 20% for the service fee. Which had profits of £379m in 2021. Fenix was responsible for collecting and distributing payments, using a third party payment provider. The company would charge the creator 20% for services by deducting the fee from a fan. They believed that they legally did not apply to the basis of Article 9a.

The First Tier Tribunal had seeked advice on this case from the Court of Justice European Union, Europe’s highest court.

Athanasios Rantos, CJEU advocate general, confirmed that the UK regulations implementing EU VAT rules for online platforms is in fact valid, and does apply to OnlyFans.

The advocate general commented: ‘The provision of the regulation implementing the VAT Directive providing that an online intermediary platform is, in principle, liable to pay VAT is valid.

‘The relevant provision of the VAT Directive does not contain any restrictions as to its scope or its extent. Accordingly, no category of services is excluded from the substantive scope of that provision.’

In 2021,OnlyFans reported record profits. Users had spent £4.2bn on the site, with currently over 100m users subscribing to it. Latest accounts show pre-tax profits rose by a staggering 615% to $432m (£379m)  in 12 months.

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Chinese takeaway loses appeal against £50k tax dispute

Yummy Yummy Takeaway in Lewes, appealed against inaccuracy penalties for corporation tax, totaling to £50,321 and VAT fraud to the sum of £34,806

As part of the investigation, HMRC believed that the takeaway had suppressed its earnings and hidden cash sales for both VAT and Corporation Tax. During the tax investigation, three unannounced visits were taken out by the HMRC and found that cash sales were largely greater than on any other day.

HMRC revealed that corporation tax returns were not valid in respect of accounting periods 02/15 (£14,729.31), 11/16 (£17,923,57) and 07/17 (£17,668.81)

The first unannounced visit took place on 15 September 2016 to Yummy Yummy. A cashing-up routine was requested by the HMRC and was carried out by Paul Donaldson. Recorded sales were £770.40 of which cash on the night was £431.80 (56% of total takings) it revealed a cash discrepancy of £44.80 with the cash being counted higher.

Continuing that, a second visit happened on 25th November 2016, recorded sales were £1,531 with cash recorded as £888.70 (56% of total takings). This showed that there was a £4.70 discrepancy between the till role and the cash in the till.

Thirdly, in July 2017, the last visit took place. By the time of this visit, the business had been transferred to a different legal entity. However the premises continued to run as a Chinese takeaway under the same style as previously Yummy Yummy did.

HMRC had a schedule of their daily takings from July 2016 and December 2016 . This confirmed discrepancies. Data was used from Worldpay and grossed up the sales believing that they represented 44% of the totals. Further corporation tax and VAT assessment also took place. Over three months data totalled £28,551.40  in till roles and £28,862.90.

Donaldosn was issued with a personal liability notice on March 27 2019, requiring 100% of the penalties from Yummy Yummy. However Donaldson argued that he had ceased trading in March 2017. He said that it was ‘not possible’ and gave information to HMRC which turned out to be false. In his defence he argued that the only reason for higher takings was because his local competitor had stopped trading.

The tribunal did not accept this reasoning and believed that Donaldson had manipulated computer entries to remove cash orders.

Judge Amanda Brown stated: ‘HMRC made a discovery of an insufficiency in the profits assessed by reference to the Worldpay data, as compared to the total sales recorded for both VAT and corporation tax purposes together with the cash to total ratio on the two unannounced visits.

‘For the reasons stated the tribunal considered that there were errors in both the VAT and corporation tax returns and that those errors were bought about deliberately through the suppression of cash sales.

‘Yummy is therefore liable to a penalty subject to a maximum of 70% of the sums assessed.’

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