Hospitality Sector on the Menu for HMRC

By Danielle Ford, Partner and Head of Tax Disputes & Resolutions, HaysMac (https://haysmac.com/)

The Hospitality sector including restaurants, takeaways, and similar businesses has come under intense scrutiny from HMRC in recent years. This is most evident in the growing number of businesses being ‘named and shamed’ for deliberate tax defaults.

What is naming and shaming?
HMRC’s policy of Publishing Details of Deliberate Defaulters (PDDD) involves the publication of identifying details for those who have deliberately avoided tax. The published details include the name, business type, address, and the amount of lost tax revenue identified. HMRC updates its PDDD list quarterly, and recent publications show a marked increase in Hospitality businesses being named. The inference here is that it is not simply the number of publications that have been increasing, but that HMRC has been undertaking more compliance activity in the sector and the rise in publications is as a result of underdeclared tax discovered in the course of the increased number of enquiries.

Details are published if one or more penalties for deliberate defaults are charged after an HMRC investigation, and if the penalties rise from of tax of £25,000 or more, where deliberate defaults relate to the underlying behaviour which HMRC alleges led to the insufficiency of tax. HMRC has three distinct behaviour types: reasonable care, careless, and deliberate, of which deliberate is the most severe and broadly means an error was committed with full knowledge and understanding.

Why is the Hospitality sector a target?
HMRC’s focus on Hospitality stems from several perceived risks. The first of these is cash trade, as many hospitality businesses still deal heavily in cash, making it easier to underreport income. Casual staff payments are an ongoing concern, as paying staff in cash without proper records immediately increases risk. Similarly Electronic Sales Suppression (ESS) is another growing cause for concern for HMRC, with the use of software or hardware to manipulate electronic sales records and till systems. HMRC is particularly keen to name and shame businesses using ESS, as it clearly signals a deliberate intent to avoid tax.

HMRC employs sophisticated software to analyse tax returns, looking for discrepancies such as unusually low sales or high expenditure. These triggers prompt further enquiries, when things don’t add up.

The impact of being named and shamed
Once published, details remain online for 12 months, accessible to everyone. The reputational damage can be severe, leading customers to choose competitors and suppliers or lenders to reconsider their relationships due to perceived financial risk. Businesses under investigation, especially those found to owe additional tax and charged with deliberate inaccuracies, can expect HMRC to monitor future filings closely.

In the worst cases, deliberate tax loss may result in criminal prosecution. Those listed under PDDD are at the highest risk of such action.

How to avoid naming and shaming
The most effective way to avoid being named and shamed is to ensure all tax filings are complete and accurate. However, mistakes can happen. If HMRC opens an enquiry, seek professional advice immediately. An advisor can guide you through the process, which can be very long running and stressful, however your advisor will seek to protect your position throughout and secure the best possible outcome with regards to negotiating settlement and penalties.

It’s also key to note that if a lesser penalty (e.g. ‘careless’) is charged, or if a deliberate penalty is fully mitigated, HMRC cannot name and shame. Professional advice is invaluable in achieving the best possible outcome. Similarly, if HMRC visits your premises, understanding your rights and obligations is crucial. Immediate professional support can help you respond appropriately.

The value of voluntary disclosure
The best-case scenario for mistakes in tax filings is to discover and address them before HMRC raises an enquiry. Making a voluntary disclosure to HMRC involves paying the lost tax and late payment interest, however the process is typically quicker and less costly than an investigation. Voluntary disclosures benefit from the lowest possible penalties, often with no penalty at all. Importantly, businesses making a full and correct disclosure are protected from publication under PDDD and criminal prosecution.

Practical steps for Hospitality operators
For hospitality operators there are some clear practical steps.

Conducting regular internal reviews, keeping up to date with legislative changes, as well as proactively reviewing and updating internal procedures, and checking records and systems for discrepancies is all crucial. ESS risks also need to be understood, ensuring electronic sales systems are compliant and not manipulated.

All payments should be documented, and given how tax can be complicated, if an issue or HMRC enquiry emerges, professional tax advice should be sought immediately. Similarly, voluntary disclosure, if you discover an error acting quickly to disclose to HMRC.

Conclusion
HMRC’s name and shame campaign is a clear warning to Hospitality businesses. The risks of non-compliance are significant, but with careful management, professional advice, and a proactive approach, operators can protect their reputation and financial health.