How to… deal with an HMRC enquiry

08 July 2011
How to… deal with an HMRC enquiry

In line with HM Revenue & Customs' (HMRC) "selective trade targeting" policy, it has set up a task force to target the restaurant trade, initially in London, then with other regional teams nationally.

HMRC believes that restaurants are a high-risk trade sector, so restaurateurs can expect to receive unannounced inspection visits. Officers will be investigating whether trading receipts are underdeclared, and whether cash-in-hand wages are paid to employees, often from underdeclared takings.

These two abuses are believed by HMRC to be widespread. The officers will be specialists, familiar with all aspects of the tax affairs of restaurants, and they will also look at claims to deduct repairs, equipment allowances and other costs in calculating profit.

HMRC will be looking to recover unpaid income tax or corporation tax, VAT, PAYE and National Insurance. This exercise will cost many traders very dear and this article aims to sound a helpful warning.

Some reasons why certain restaurants are targeted by HMRC are:

â- Evidence that a trader's lifestyle is incompatible with the trading profits disclosed.

â- Gross profit rates below those of similar businesses locally.

A whistle-blower may make allegations of evasion to HMRC; a piqued ex-employee, a competitor or even a dissatisfied customer; yes, this really does happen sometimes. An HMRC website even invites the general public to report any irregularity by telephoning the Tax Evasion Hotline: 0800 788887.

The legendary HMRC nose never stops sniffing. Test restaurant meals and take-aways, and secret surveillance of premises and customers to estimate numbers and possible turnover, are common practice. This leads to a later inspection of records, by which time the damage has probably been done.

HMRC officers can make a check on stocks of alcohol. If the officer discovers undutied ("bootlegged") stock on the premises then estimated assessments for the duty and VAT on such sales can be expected. In addition to the "best judgement" assessments, the trader would also be subjected to heavy interest and penalty charges.

In short, it is not worth indulging in irregular practices.

Noshir J Avari, principal of Avari and Associates, tax investigation

five ways to react in the event of an hmrc visit

1 Be very careful in giving replies to initial enquiries in the pressure of the moment. If these are later shown to be inaccurate, then a trader would have lost a great deal of credibility. It is best to answer truthfully; say so if you don't know the answer and if in doubt ask for time to consult an adviser, or to review the records away from the immediate stress.

2 While the trader's first port of call would be his accountant, many accountants have mixed feelings about enquiry work. The accountant will have prepared the accounts and various returns from information supplied, and if details have been suppressed, he may not feel very enthusiastic about vigorously defending his client.

It is well worth discussing with your accountant the usefulness of consulting an investigation specialist. In the long run, that could not only save you time and money, but also reduce the level of stress and anxiety and allow you to concentrate on the running of the business.

3 If investigated, it is important that everything known to be wrong with returns is disclosed, and that any undisclosed assets such as property and bank accounts are examined and reconciled.

4 If you are aware that your business records practices are wrong, then you must stop them immediately. It is important to discuss with a professional adviser how best to make a disclosure of any tax arrears. HMRC will generally be prepared to make generous concessions to traders who voluntarily put their affairs in order.

5 It is important to seek good professional advice as early as possible.

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