There are many industries and fields where a business can expect to go through their entire career with perhaps one or two HMRC tax investigations at most.  Unfortunately, as those who have been in the market  for a long time will know this is certainly not the case for business owners in the Takeaway industry.

It would be no exaggeration to say that Food To Go is the most heavily investigated industry in the entire UK.  With this in mind, what should we be aware of what and what can we do about it?

Any business owner should spend at least some time thinking about the following questions:

 

  • What determines the likelihood that HMRC will open an enquiry into my business?
  • If an enquiry is opened, how can I best defend my business from any assessment?
  • If worst comes to the worst and HMRC find errors in my records, how can I ensure any assessments and penalties are at an absolute minimum?

In this article we will spend a bit of time looking at the factors which cause the Takeaway Industry to be so heavily inspected and, where possible, what you as a business owner can do to reduce the risk that one of these factors will trigger an HMRC inspection of your business.

In follow up article we will cover how to handle HMRC when you do get an enquiry and how to deal with a situation where you are facing an enquiry which has found grounds for actual assessment against your business.

 

HMRC Enquiry Risk Factors

The best result one can hope for from dealing with HMRC is not winning or closing an enquiry or dispute, but never having an enquiry opened into your business in the first place.  Even If your records are immaculate and your figures consistent, demonstrating to HMRC’s satisfaction that you are honest and have made no errors is an exercise which could demand dozens of hours of time both from you personally and from your professional advisers.

There is no one factor which determines who will be investigated, but it helps to have some familiarity with how these are opened in the first place so you can avoid being dragged into one.  Nowadays, HMRC rely upon algorithms and data analysis to highlight high risk business which can be flagged for a formal investigation.

Gross Margins

Food to go businesses tend to have quite predictable margins at which profits can be made.  There is always variation based on market and pricing, but HMRC expect a food business to show food costs of somewhere in the realm of 30% of turnover.  A business showing 20% or 40% will not attract attention, but a set of accounts lodged alongside a return which shows food costs at 70% or 10% of turnover are highly likely to trigger a formal HMRC visit and investigation.

A set of accounts showing extremely high food costs are an indication that the business may be failing to declare all of their sales properly.

A set of accounts showing extremely low food costs are even worse, as HMRC see this as an indication that the business may be reporting fake sales and could be engaged in money laundering!

VAT Registration Risk

HMRC are alert to the reluctance of any business to register for VAT.  In the takeaway industry, the moment a business crosses the VAT registration threshold of £90,000 in any 12 month period, they are obligated to act as an unpaid tax collector for HMRC and usually have to increase their prices by 20% to account for the VAT.

Were this not difficult enough, honest taxpayers who have registered for VAT frequently find themselves in direct competition with less ethical owners who are engaged in sales suppression to avoid hitting this threshold.  HMRC know this pattern well and will actively seek out businesses which have skirted close to the VAT threshold without becoming liable.

VAT is always a tempting target for HMRC as investigations under this rule allow them enormous scope to issue enormous penalties with very limited grounds for appeal.

VAT Mix Risk

Tied to this matter, the food industry also suffers from incredibly complex disputes over the VAT treatment of certain products.  Large companies have spent millions contesting whether their product is a biscuit or cake.  Famously in 2012, Subway lost an enormous case over whether their sandwiches were being cooked or merely kept hot for the customer.  This strange and nuanced point cost Subway and their franchisees Millions of pounds in VAT assessments and penalties.

Here again, HMRC have cynically concluded that these complex and confusing rules make the food industry an easy target for VAT assessments.  Errors can be made by simple staff till operation errors like failing to correctly record cold or hot food or failing to note whether a customer is sitting in or taking away.

One infamous situation in an old VAT case involved a secret HMRC inspector arriving on site as a customer, placing an initial order for their food to be taken off premises, then correcting their order after the staff member had begun their work to a sit in order.  Unless the staff member called their manager over to change the initial order from takeaway (which is zero rated) to sitting in (which requires 20% VAT), they would then use the receipt as proof that the business was under-declaring VAT!

Payroll Risk

The Takeaway industry has a long history of employing casual staff who will frequently pressure employers to be kept off payroll so as to gain access to universal credit.  HMRC have extensive knowledge of this area and while they have no history of punitively enforcing this, they are alert to particularly extreme examples.

Any food business which does not operate any payroll or which has a particularly low number of employees on their monthly HMRC Payroll Reports will be flagged as a PAYE Assessment Risk by the taxman.

Inspectors are Customers too!

One easy point to forget is that inspections can be directed to your business by the simple fact that if you serve enough customers through your business you are almost certainly, sooner or later, going to unknowingly hand a receipt to an HMRC staff member!

While this is no guarantee that they will direct an investigation towards you, obvious errors in your till receipts can be easily detected by a keen HMRC agent.  Hot food without any VAT charge is an obvious point of risk.

However, beyond unknowing errors like this, members of the public expressing an interest in your business could be HMRC staff.  We have seen a few investigations which were opened on the back of friendly and talkative business owners who engaged in unwise gossip with what they later realized were HMRC agents.

When it comes to your financial affairs, discretion is key!

Cash Risk & Sales Suppression

The food industry deals heavily with cash in hand transactions and alongside this comes an opportunity for businesses to pocket this income without declaring it in any way.  HMRC are as aware of this as anyone else in the industry.  HMRC have pushed heavily in recent years for greater powers to tackle the most common tax dodges.  In general big red flags are businesses reporting no cash takings in their returns and businesses using inappropriate till software.

On the inappropriate till software note specifically, many years ago HMRC became highly alert to a common tax dodge involving tills which had a switch to create duplicate sales records – one of which would be given to HMRC and another kept for the owners.  HMRC’s powers were vastly expanded on the back of this and further extended in the Finance Bill 2021-22.  They have powers to check the source code of till software, can carry out entirely unscheduled on site till reviews and will conduct national investigations into companies relying on illegal till software.

Three weeks ago, HMRC announced they were launching a Nationwide Investigation into electronic till fraud with a series of surprise raids on takeaways

Fraud & Money Laundering

While it is a given that any member of the Takeaway Association is a properly registered business, the industry as a whole is specifically targeted by HMRC because there are many unethical actors who are running criminal enterprises.

A common scam for example, is restaurants and takeaways businesses registered in the name of foreign nationals.  These businesses trade for a year without paying any tax and when they hit the point where they would have to disclose their income and pay tax, the on-paper taxpayer  will leave the country without settling any liabilities.

Worse than this, some businesses (as in a case we directly dealt with a number of years ago) will convince perfectly innocent migrants to become on-paper owners of businesses as “new investors”.  The real owners (frequently referred to as Shadow Directors) will then run the business using their investors identity and details, pocket all of the money and leave the naïve “investor” liable for all of the tax liabilities and penalties.

In the case we dealt with, even when we could show HMRC that our client had been mislead and defrauded, HMRC chose to bankrupt and seize the family home of the innocent victim to recover the unpaid business taxes.  HMRC are not your friends and in cases like this will see it as their duty to recover tax using any means possible, even relying on blatantly unjust methods like this.

 

Summary

Many industries can avoid having a plan in place for how to handle HMRC.  Likewise, any active business owner will know that many individuals can go their whole lives engaging in risky activities which HMRC would surely disapprove of.

This is not a luxury available to the Food To Go Industry.

For decades now HMRC have consistently pushed a policy of aggressively and repeatedly targeting Takeaways and food businesses.  This is in part driven by the number of bad actors who are engaged in deliberate tax evasion, but it is also driven by HMRC’s own cynical approach to targets.  They are particularly aware that even honest taxpayers can be perplexed or confused by the extremely complex rules around VAT on food.  They are aware that successive governments have failed to give simple rules which would be easily complied with.  Instead, the takeaway industry has become a source of easy tax wins for HMRC who can guarantee that even the most diligent and honest people will accidentally trip over an obscure point of VAT compliance and allow HMRC to penalize them for thousands of pounds.

Unfair and unreasonable as the tax rules are in this sector, the best strategy for any business owner is to ensure that you get ahead of the risks.  A knock at the door from HMRC is probably inevitable for any long running food business, but by understanding your finances and how HMRC operate, you can keep these arduous compliance checks to a minimum and focus on growing your business instead.