This article looks at RSM’s experience of how HMRC operates, its powers to investigate taxpayers, and provides some practical advice.
In HMRC’s view, restaurants are prone to under paying VAT because of the amount of cash that they handle; in extreme cases HMRC may even claim that evasion is taking place. This is not because the industry is regarded as being corrupt, it is a peculiarity of the law. VAT is due every time a customer pays for a meal, so even if a member of staff has stolen the payment and/or not run the sale through the till, VAT is due to HMRC. Therefore, even businesses acting in good faith could be guilty of underpaying VAT.
HMRC’s first step to identify those guilty of suppressing takings is to sift through all the data it has on restaurants up and down the country to identify unusual trading patterns. Having identified a few restaurants, the next step is far more familiar; HMRC officers will conduct several covert sample purchases.
The first time a business may be aware of HMRC’s work is when an HMRC officer asks to view the business records. The officer will try to find evidence that HMRC’s covert purchases have been included in the VAT return. If there is no record of HMRC’s purchases, the investigation begins in earnest.
HMRC must then decide how much VAT has been underpaid and whether the owner is complicit. From the records available, and taking account of the covert sample purchases, the officer will raise an assessment to ‘best judgment’ for the amount of VAT they believe is due. This will be accompanied by any penalty that may be applicable. If the owner is thought to be guilty of misstating earnings, this penalty could be as much as 100 per cent of the VAT underpaid.
As you would expect, HMRC’s powers to tackle tax avoidance and evasion make for sobering reading. However, there are important checks and balances that all taxpayers should be aware of.
For particularly high risk cases HMRC can conduct an unannounced visit. This involves three or more HMRC officers arriving without warning at the business’ premises. These officers are authorised to enter the premises and conduct an inspection of the premises, its assets and the business’ records.
The best way for a legitimate business to prevent an HMRC visit is to put in place measures to prevent staff theft, then keep these measures up-to-date. Sadly, there is no way to prevent an HMRC visit, so what else should you know?
First, because any member of staff may be working when HMRC make an unannounced visit, it is key to make sure that a senior member of the team is contacted as soon as HMRC officers enter the premises. This should ensure that a helpful junior staff member without full knowledge of the business does not provide incorrect or misleading information. At this stage the owner may decide that professional advice should be sought.
Second, when HMRC makes an unannounced visit its officers are obliged to produce a notice of inspection and an HMRC factsheet. It is critical that you take the time to read both documents before allowing HMRC’s officers free reign. The notice is very specific on the visit’s date, time and the HMRC personnel that will be involved. It is always worth checking that HMRC is abiding by the terms of this notice.
Third, many HMRC officers misunderstand their authority during a visit. HMRC cannot conduct a search of the premises, ‘business documents only’ means the records required for statutory returns (not every available analysis) and, perhaps most importantly, the notice cannot compel you or your staff to participate in an interview. I should also say that you can refuse to permit HMRC officers to exercise the notice, but in some cases this could increase any penalties that arise later in the process.
The more familiar announced visit must be arranged at least seven days in advance. HMRC usually requests that four years’ records are made available at your premises. While this is a far more orderly process, the seriousness of this visit should not be underestimated. Therefore, whether a visit is planned or unannounced, it is always worth considering whether to take advice early in the process.
Few businesses want a visit from the taxman, no matter how noble the cause. However, there are several practical measures that can be taken to ensure that investigations run smoothly.
by Philip Munn, Partner at RSM