Cooked books come off the menu for restaurant owners

In the past few weeks HMRC has launched yet further initiatives designed to identify businesses with tax shortfalls and this time, it’s restaurant owners and VAT dodgers who are in the spotlight.  These campaigns are big business for HMRC; over the course of their previous campaigns, £500m has been recouped, with an extra £100m due from taxpayers who did not take advantage of previous disclosure opportunities.

Yields of this magnitude are undoubtedly very pleasing for the Government, who has set aside £900m for its efforts to tackle tax evasion.  A return on investment of this level demonstrates an excellent result and shows tax payers are keen to take advantage of the chance to ‘come clean’ with minimal penalties payable.

The VAT Initiative – voluntary disclosure opportunity
This campaign is aimed at identifying individuals and businesses with turnovers exceeding the VAT threshold (turnover of £73,000) but which have not registered for VAT.  It is likely the initial information on suspects will have been gleaned through a review of Companies House data and self assessment tax return information.  An estimated 40,000 businesses have been identified as probably needing to be VAT registered and will receive a letter from HMRC.

As has been the pattern during previous campaigns, there will be an opportunity for businesses to make a voluntary disclosure during the VAT initiative.  To take advantage, business owners should inform HMRC of their intention to participate by 30 September 2011. They then need to pay outstanding liabilities by 31 December 2011.  It is also possible to use the disclosure opportunity to declare other tax liabilities that may exist.

In terms of penalties due, HMRC has confirmed they will be fixed at 10%; far lower than the usual 100% of the VAT payment due.

Tax evasion for restaurant owners
It’s not surprising that restaurants have fallen under suspicion for tax evasion as they have always been a lucrative source to HMRC of income through enquiries.  It’s where the expression ‘cooking the books’ originated.

There are a number of ways to establish whether the books are indeed being cooked and it’s worth understanding these to decide whether to take advantage of the disclosure opportunity.  Firstly, by applying a simple economics model to the restaurant trade, HMRC can calculate what the takings should be, based on purchases made by the business.

It is quite common for a tax investigator to conduct a ‘mystery shopping’ exercise; they will usually pay for their meal in cash, take note of the purchase details and also do an assessment of how many other customers were in the restaurant at the time.  They then check at a later date to see if their purchase was entered into the accounts and how many of the other customers’ purchases feature in the books (or not).  Additional validation checks can be applied to restauranteurs by a tax investigator weighing uncooked food in kitchens and then using the amount recorded to estimate gross profit margins.

Restaurants also have something of a reputation with HMRC for employing staff illegally.  Another investigations technique is to take note of the number (and names) of staff on duty and check this with PAYE records.  In many instances, staff are not on the payroll, may be illegally working in the country and being paid cash in hand, possibly out of unrecorded cash sales.

Our advice on disclosure opportunities
Any business owner with a tax shortfall – whether for VAT, PAYE, NI, income tax declared on a self assessment tax return or corporation tax – is advised to use these disclosure opportunities to limit the level of penalties payable.

Restaurant owners (and all other businesses) are advised to be scrupulous about their record keeping, ensure paperwork is up to date and maintain detailed evidence accounting for all purchases and sales. Taking these precautions will be invaluable in the event of a tax enquiry.