Cooking the books

10 January 2003 by
Cooking the books

In the next few weeks, at least one high-profile chef will be prosecuted for tax evasion. No doubt the news will be splattered all over the nationals, and although the chef's reputation will be in tatters, he'll probably get away with just a fine.

However, the bigger story, which will escape most of the media's attention, is the injury against the chef's employers - out of pocket to the tune of hundreds of thousands, possibly millions, of pounds - and the establishment's customers who have been paying over the odds for their meals.

Backhanders, bungs, back-scratching or straightforward bribes - however it is described, it is a practice that some allege is endemic in the catering industry… and it's about to be uncovered.

The Inland Revenue has mounted a major investigation into the tax affairs of leading chefs throughout London and the South-east. The first chefs were interrogated back in June, and by the year-end some cases were being settled, with chefs agreeing to pay fines and the amount of back tax the Inland Revenue reckoned was owed.

But according to sources close to the investigation, the Inland Revenue is looking for a "scalp" to justify its expensive inquiry and provide a warning for others.

David Pert, director of tax investigations at London-based consultancy WJB Chiltern, is advising a number of catering industry professionals being investigated by the Inland Revenue. And although the number on his books is only in double figures, he believes the Inland Revenue has devoted a lot of resource and effort into its inquiries to date. "There have already been settlements into the six figures and this is strengthening the Inland Revenue's hand," he warns.

The focus for the investigation is head chefs at major hotels and casinos and the suppliers to these businesses, he believes. It is not clear what has prompted this investigation. It might be that it is simply catering's turn - almost every profession, from taxi drivers and racehorse jockeys to comedians, has been spotlighted. Most likely, however, is that the falsified books of a collapsed catering industry supplier aroused sufficient suspicion to warrant the investigation.

Pert believes that the discovery at this supplier of certified schedules of chefs taking bungs prompted the Inland Revenue to put its top team - the Inland Revenue Special Compliance Office - on to the job. Armed with this list of names and evidence, the crack squad has been grilling some of the country's leading chefs. The trail has also led to other suppliers, some still trading, who will in turn have been forced to disclose those they were bribing.

As the investigation has deepened, the net has widened to include a number of big-name chefs. The Inland Revenue has no limit on how far back it can investigate, and Pert believes transactions more than a decade old are being examined.

During the research for this article the names of a number of leading chefs were put forward as being guilty of accepting backhanders. Not surprisingly, all who were approached deny the practice. One of those named says: "Until it is proved it won't make any difference to the industry." And this attitude, commonly held, is one reason why the Inland Revenue will want to take at least some people to court.

Others spoken to, although not under suspicion, were extremely guarded in their comments, preferring not to be directly quoted. What these off-the-record conversations revealed, however, was that the practice is widespread. One chef admits that, while running the kitchens of a leading London hotel, he was offered up to 10% of the food bill as an "inducement" to remain with the existing suppliers. The unit was being invoiced by its suppliers for about £2m a year, meaning the bribe could have put almost £200,000 into the chef's back pocket had he accepted.

Another chef says that the percentage cut offered was 5% by his fruit and vegetable supplier and 2.5% by the company delivering his fish. The payment was offered in cash or directly into his bank account. The suppliers were billing his kitchen for £8m.

"The first time I was offered a backhander, I phoned a friend who explained how it worked. I had no idea you could make so much," he says. "But when you look around at the lifestyles of some chefs, taking bribes is the only way it can be supported."

As well as the crude cash envelopes, some suppliers are happy to meet a chef's personal bills. Picking up incidentals like parking tickets to bigger items such as home improvements and all-expenses-paid holidays are also among some of the sweeteners on offer.

It would be wrong to take this too far - a bottle of whisky or a case of wine once a year from a trusted supplier hardly represents rife corruption. And leading chefs are entitled to take a consultancy payment from suppliers for recommending and using their products - providing it is declared.

But the level of fiddling being alleged would cause significant damage to the owners of the businesses concerned if true. The presence of the Inland Revenue's Special Compliance Office, a team that typically gets involved only where the tax fraud runs to at least six figures, suggests a serious problem. But few in the industry want to publicly admit it.

"There is a problem but I'm not convinced everybody is involved," says one celebrity chef. "There could be a way to handle this more sensitively that won't damage our industry. I don't want to see parents telling their children not to enter the industry. It used to be that the parents worried their kids would be punched - now they'll think we'll turn them into criminals as well."

The damaging publicity is precisely what the Inland Revenue wants, however, to scare people into paying their taxes, although its official line is that it simply wants the right amount of tax paid.

For the owners of the businesses concerned the issues are more worrying, however. The kitchen has for too long been an area over which they have little understanding or control. The food and beverage director of a major hotel chain admitted that although there are audit controls in hotel kitchens, chefs have the ultimate responsibility. A chef can argue in favour of supplier A rather than B, despite higher prices, because of better quality, for example. The subjective assessments of quality or on-time delivery are not easily punched into an accountant's calculator and are often waved through.

Some industry insiders argue that the shortage of skilled chefs has encouraged the owners of hospitality businesses to tolerate a certain level of corruption. "Management turns a blind eye as long as we hit our gross profit margin and guest satisfaction levels," says one anonymous source.

The current publicity is helping to wipe out the problem. WJB Chiltern's Pert expects the practice to "pretty much stop", but it could be a tense year for many chefs. Some may already have been called in for interview by the Inland Revenue and others may be under investigation but as yet unaware of it.

The advice from the Inland Revenue is the same as that from independent tax advisers: if you fear investigation, come forward before the Inland Revenue calls you. There is no amnesty, but the Inland Revenue can agree not to prosecute and penalties may be reduced.

But it is not just the Inland Revenue which is investigating. Many owners are now watching the accounts from the kitchen much more closely, with some carrying out their own investigations. Even innocent chefs may now feel the hot breath of proprietors more closely.

Worst off in this whole scandal, however, are the suppliers. Many have been driven to offer bribes simply to stay in business, and they are likely to suffer the consequences the most. Suppliers which overcharge the customer and split the difference with the chefs could be prosecuted by the Inland Revenue and are certain to face a bleak future. Not only will these undeclared sums they are liable for be huge, but few if any businesses will be prepared to trade with them. Closure could be the only option.

The long-term picture for the catering industry, however, is much healthier. Removing corruption will cause supplier prices to drop and the market to become more competitive. Owners, suppliers and customers should all be better off. Some chefs may not be able to finance extravagant lifestyles for much longer, but for the vast majority it will be a better place to work.

Some other tricks

Chefs and suppliers have cooked up a number of ruses to further dupe management. One such is known as "legging", where the person loading and unloading the produce jumps on the scales with the sack of vegetables or box of meat. The owner of the kitchen is then invoiced for this excess and the difference split between chef and supplier.

Alternatively, boxes can be filled with waste products - such as bones - and the boxes invoiced as if expensive raw materials such as fillet steaks.

Stamping it out

Ivan Shenkman, managing director of Purchasing Systems, argues that the only way to stamp out the practice of backhanders is to remove the purchasing function from chefs and put in systems that will protect the chef, owner and suppliers.

The systems involve putting independent auditors on to the back door of kitchens, counting and checking that what comes in marries with the invoices. "Chef no longer has the potential to be associated with the backhander stigma and can focus on the craft of cooking," Shenkman says.

Many kitchens have manuals and systems but these are rarely used, Shenkman adds. Crucially, invoices are not independently validated.

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