HMRC's techniques for investigating restaurants
David Anderson, solicitor and chartered tax adviser, explains how HMRC carries out investigations into restaurants for suppression of income. He explains matters every entrepreneur should be aware of if they are contacted by the taxman enquiring into their affairs.
Please note that tax investigation work is a complex area and you should not rely on this article without professional advice on the facts of your case.
The restaurant trade has long been a target for HMRC investigations. This article sets out the way they are usually conducted and some practical advice for taxpayers. In particular, David deals with requests by HMRC to formally interview you and the kind of questions you are likely to be asked by the tax inspector.
Initial visit and inspection
Usually the first time the restaurant owner knows there may be a problem is when HMRC ask to meet him usually at the restaurant. During this meeting HMRC will say that they think suppression of takings is taking place and ask the taxpayer whether he has anything to tell them. This is presented as an opportunity to “come clean” and avoid any penalties or interest. HMRC may also ask to inspect the cash machine. If there are partners in the business they will want to interview them all. This meeting is usually presented as an opportunity for the tax payer to be helped by HMRC to declare any arrears and set up arrangements to ensure all takings are declared going forward.
It is a good idea to attend this meeting with HMRC and to ascertain what they see as the level of suppression and what they are concerned about. You should, however, not let them speak to your staff and you should be guarded in how you answer any specific questions. It may be better to have the meeting at HMRC's offices and not at the restaurant. Your tactics here should be to listen to what HMRC say but not to commit yourself to any specific replies. Any information you give here can be used in evidence at a tax tribunal.
Tax payers often wonder what has triggered a visit by HMRC. It is usually triggered by one of the following, though HMRC will never tell you:-
- Your VAT return shows that turnover is regularly unusually low given the VAT you are reclaiming on your supplies.
- Your business accounts show the return you are making is unusually low and could not support your lifestyle.
- Disaffected former employee or a competitor.
- Large cash deposits appearing in bank accounts in your name or connected with you.
- Employees being paid in cash with no PAYE.
These may have been made before the initial inspection but will continue afterwards. HMRC will visit the restaurant at various times and purchase meals. They will keep the cash receipt and meal ticket which they will ask the taxpayer to match up with the receipt from his cash machine. In some cases a bill may be paid partly with a credit card and partly in cash. HMRC will check later on whether only the credit card part of the bill was recorded. Take away meals will be ordered and paid for in cash. In all these cases HMRC's officers will make written statements of the times of their visits what was purchased and how many other customers were in the premises.
Business economics test
HMRC will obtain details of the restaurant's suppliers and find out how much the restaurant orders say weekly. A calculation will then be made of the amount of food purchased. A deduction is given for wastage and possible staff theft using percentages which are common in the trade and then using usual portion sizes HMRC work back to the total number of portions which would have been sold each week. HMRC will have a copy of your menu and so can roughly work out total sales often using an average meal value.
The total sales they estimate you have made are then compared over a number of weeks with your declared sales so that allowance can be made for holiday periods and other times when trade may be particularly good or bad. The average is then used to calculate a suppression percentage. HMRC will seek to obtain roughly the same percentage suppression rate using a number of different routes to establish their case.
HMRC will count the number of people entering the restaurant and leaving over several representative periods including quiet and busy periods. They will also try to identify people taking takeaways out. This is quite difficult for HMRC to do. Their object is to work out the likely takings say at lunch time and in the evening over a number of weeks. They will say count that there were 30 covers at lunch on a certain day and then ask you to produce your records showing the number of covers. If, say your records only show 20 covers, then they will claim a suppression rate of 1/3rd.
Identifying the number of takeaways is much harder. Taxpayers normally say in court that the people leaving were taxi drivers or staff going out to smoke or people who had eaten in the restaurant. HMRC's officers will say the people leaving were all carrying bags.
Wet goods mark up
HMRC obtain details of the drinks supplied to the restaurant over a period of time. They will then work out the amount each customer would have drunk based on the declared turnover and seek to show it is absurdly high. There are well established figures of how much people drink at meals. If your declared alcohol purchases are very high compared to the declared meals you are selling so that it appears each customer drinks 10 pints of beer then customs will have a strong case. Tax payers normally say that alcohol is used in cooking, is consumed by staff or that there are breakages or theft.
HMRC will return a few months later and seek to have a formal interview with the taxpayer which is usually recorded. The questions they ask are designed to close down “escape” routes and the interview will be typed up and used in court. The questions usually cover the following:-
- How many staff do you employ and what are their roles?
- Who manages the cash till and cashes up at the end of the day?
- Who does the businesses accounts?
- Where do you keep the paperwork regarding the running of the business?
- Has the cash machine been working normally?
- Is there only one cash machine?
- Have you ever sacked or disciplined anyone for theft of stock? Are you aware of any thefts?
- Do you allow staff to drink whilst working?
- Who orders your supplies? How do they pay by cash or credit card or is it all on account?
- Do you go to a cash and carry for any supplies? Who does the buying?
- Have you had any particularly busy or quiet periods over the last 3 months?
- Are there any days when trade is particularly busy or quiet?
- Have you advertised in the last 3 months or had any promotion which has recently boosted trade? If so please provide the promotional material.
- Do taxi drivers get any free meals? Do they come into the restaurant or wait outside?
- Are take away meals always sold in a specific carry bag?
It is best to get professional advice before agreeing to any such interview. This interview is likely to form a large part of HMRC's case against you. Ideally you want HMRC to send their questions to you in writing before any meeting so that you can properly consider them with your tax adviser and not be pressurised into giving hasty, ill-considered replies under pressure.
Solicitor and Chartered Tax Adviser