Serious omissions, lax supervision and “black holes” in public revenue were uncovered in an Audit Office report into the tax behaviour of 11 companies operating leisure and dining venues in Larnaca’s Mackenzie area.

The report, based on 2023 data collected by the deputy tourism ministry, criticises the tax department’s “lax approach” toward these businesses, despite clear signs of tax evasion and a “troubled history” of compliance.

In one case, auditors found that a company had been reported for failing to issue receipts and keeping a “black cash bag” beside the legal till.

During a control visit, the business even cut power at 4.45am while inspectors were attempting to print the day’s takings.

Despite this, no targeted or meaningful follow-up checks were carried out, nor was any specialised anti-tax-fraud unit brought in.

The report also found that most companies were taxed “based on their own declarations” up to and including 2021, without substantial audits.

In some cases legal deadlines expired, preventing the state from imposing further taxes.

The Audit Office also noted that companies whose financial statements carried auditors’ opinions “with reservations” or “emphasis of matter” were not reviewed.

The report further shows high and inconsistent management and personnel expenses declared without documented justification, alongside investments in subsidiaries without the proportional limitation. This increased the risk of deductible expenses being accepted without proper audit.

The report additionally flagged numerous concerts by well-known artists held in 2022 and 2023 for which no artist tax or VAT was reported and highlighted inadequate event registers and a lack of data flow to the Tax Department, “in violation of the 2019 VAT decree.”

VAT was allegedly calculated on a “conservative estimation basis”, excluding high-attendance events – a method which, the report warned, “may have underestimated the companies’ actual tax liabilities.”

Auditor-general Andreas Papaconstantinou said the Tax Department had taken more than three years to align itself with court rulings on reduced VAT rates for catering services and had applied different VAT rates to similar businesses, creating “conditions of unfair competition.”

The report urges the Tax Department to prioritise risk-based targeted audits, strengthen cooperation with the relevant authorities and establish mechanisms to ensure faster alignment with legal rulings, to minimise “the risk of significant tax revenue losses for the state.”

“The upcoming tax reform should provide the tax department with the necessary tools to effectively and rigorously implement the law and crack down on tax evasion to the greatest extent possible,” Papaconstantinou said.

Finally, the report adds that, according to the deputy ministry of tourism, none of the Mackenzie establishments under review hold a valid operating licence — though this issue, it added, did not fall within the scope of the current audit.