HMRC VAT Inspections of Restaurants and Takeaways
HMRC taskforces target taxpayers where there is a strong suspicion of tax evasion. Taskforces were introduced in 2011 and investigation by them can result in substantial fines and even criminal prosecution. The very first taskforce team targeted restaurants. 531 restaurants were investigated for tax evasion, beginning in Scotland, the North West and London, and soon expanding to other areas of the country. HMRC predicted a tax yield of around £15m from this restaurant crackdown. Although HMRC was very clear that honest businesses should have nothing to worry about, this guide will explain what you should expect to happen if you receive a request for an interview by HMRC.
Meeting request by HMRC for Inspection
Restaurants have long been targets for HMRC officers. However, a restaurant won’t usually know that they have been targeted until HMRC requests a meeting, most commonly to be held on the restaurant’s premises. HMRC will advise that they suspect that the restaurant is not declaring all of its sales and will ask the business owner if they would like to choose to admit anything. This is a chance for the restaurant owner to admit wrongdoing and offer to pay back the tax owed, reducing or avoiding any penalties that would otherwise be charged. All partners in the business will be asked to attend the meeting and be interviewed. HMRC may also ask to inspect the cash register. The initial meeting will be seen as a chance for HMRC to act in a helpful capacity to allow the restaurant to identify any areas of tax that may be payable, and look at procedures going forward that would enable them to declare all the tax owed more effectively.
The best policy for restaurant owners is to agree to meet HMRC and do so with an open mind to find out how much HMRC believe has been suppressed and their exact concerns. Business owners should remain guarded but honest and advise staff not to speak to HMRC officers in an attempt to avoid any misunderstandings. Ideally, try to rearrange the meeting to be held at HMRC offices rather than on your business premises. Listen carefully but don’t commit to any specific assurances or answers, as these can later be used as evidence against you if found to be false.
You are unlikely to know from the outset the reason for HMRC’s visit, but it is usually due to one of the following reasons:
- Your VAT return may suggest an unusually low turnover when compared to the VAT being reclaimed on supplies.
- Your accounts may suggest that your VAT return is very low in comparison to evidence of a more luxurious lifestyle.
- If you are very unlucky an ex-employee or competitor may have passed on information to the HMRC, possibly due to a previous grievance.
- Your bank accounts or bank accounts connected to you show unexplained big cash deposits.
- HMRC may have uncovered the fact that you are paying your employees cash in hand.
Be aware that HMRC may visit anonymously prior to the visit and make purchases that they will later ask you to match up with the receipts from your cash machine. A technique sometimes used is to pay half cash and half credit card, they will later check that both cash and card have been recorded. HMRC officers will have clear records about goods purchased and times of visits. They will also note how many other customers were present at the time, so your records need to show a corresponding number of receipts.
Outside of the restaurant, HMRC will contact suppliers to find out the quantity of your weekly orders. They will then do a calculation of what the restaurant has purchased, minus wastage and potential staff theft, and take into account estimations of portion sizes. Based on this, HMRC officers will work out a rough estimate of portions sold and revenue gained to check that their figure for sales match yours. Allowances will be made for holiday periods and good and bad weeks of trade. This enables HMRC to come to an average sales total over a number of weeks.
Watching and learning
During both busy and quiet periods, HMRC offices will count the amount of people visiting the restaurant and watch how many order takeaways. The aim is to calculate the amount of takings. They can also ask you to provide evidence to check that the amount of covers they counted matches the number of diners you have accounted for. So, if they have counted 40 covers and your records show only 30, they can calculate a suppression rate of 25%.
Takeaways are much more difficult to account for. People can be seen carrying takeaway bags out of a restaurant but often, takeaway restaurant owners make the claim that the people leaving the premises are perhaps taxi drivers or staff members.
There are well-established figures to indicate how much alcohol people drink with meals. HMRC will seek to gain figures ordered from suppliers and then check what the restaurant claims each cover has consumed. If the actual figure is much higher than the expected figure then suppression is suspected. Arguments that are often used for this calculation are spillage, breakage, staff consumption or usage in cookery.
Following evidence collection
A few months after the initial collection of data, HMRC will seek to conduct formal interviews. The questions asked will attempt to close any loopholes that could potentially be used later in court by the restaurant owner.
All of this may seem a little worrying and intimidating. The best course of action if HMRC request an interview is to take professional advice, as any evidence they glean through the interviews will make up their case against you. The best scenario for a restaurant owner is to receive the questions in advance so that a tax adviser can go through them with you, rather than answering under pressure. Bear in mind that if you are deemed to be liable for more VAT by HMRC, this means your revenue is actually greater than initially declared. Therefore, you also need to consider your liability for increased income tax. A tax adviser will be able to assist you with this assessment as well.
If you have an investigation or VAT compliance check call our specialist tax accountants today in Birmingham on 0121 629 7768 or London on 0207 078 4001.