Clients who have discussed tax planning with us will be aware that we frequently advise that certain industries are at much higher risk of HMRC activity than others. The industry which is consistently investigated more than any other is the food and hospitality sector – especially takeaways or businesses selling a mix of hot and cold food. These present a tempting target to HMRC for a number of reasons:
- The sector is infamous for owners failing to declare cash sales.
- There is a pattern of businesses attempting to bypass the VAT registration threshold in particular, as this prices them uncomfortably above a lot of competition.
- The VAT rules around hot/cold food are complex and these complicated traps lead to people making innocent errors – rather than education, HMRC perceive these as easy victories where owners ignorant of the difficulties of VAT can be assessed for tens of thousands of pounds. People may remember the infamous Pasty Tax Scandal in 2021.
- These businesses are often run by families or people without good professional representation and so can struggle to adequately defend themselves in the event of an HMRC investigation.
HMRC’s usual habit with investigations is to carry out batch checks industry by industry – every few years they will hit a lot of food businesses at once, then they’ll move onto a new sector and in the meantime the food sector will get careless enough again for HMRC to hit them with another round of assessments, and so it goes.
Till Fraud
Their latest wave of investigations are more specific than usual – targeting fraudulent till systems which can alter electronic point of sale records. These tills appear to record information correctly, but manipulate the underlying data by deleting sales and linking to offshore payment platforms which are not easily accessed by HMRC.
To combat this, HMRC will pull data from external sources like Paypal and other payment providers, access bank statements or directly log in to till software platforms. This is compared automatically against reported income to identify discrepancies and target businesses at high risk of fraud or underdeclaration. Anyone using, supplying, making or promoting ESS can face fines of up to £50,000 or criminal prosecution.
However, it is worth highlighting again that even businesses in this sector who have done nothing wrong and are fully compliant with VAT and other tax obligations are still much more likely to be investigated than other sectors. Any client in this area would be very wise to speak to us about our tax insurance policy – which covers all accounting costs in the event of an HMRC investigation and is available for £40 per month.