Tony Monger, a former Tax Inspector who is Director in the Tax Investigations & Employer Solutions team at accountancy firm Mazars LLP, talks about the issues facing the catering sector from HMRC enquiries
It is a simple truth that the Taxman does not like cash. In his experience, it has a nasty habit of slipping into people’s hands rather than into a till. Bank transfers, BACS, CHAPS and cheques all need to be deposited somewhere. Typically the Taxman will find out about an undeclared bank account, then it’s a simple matter for him to just add up the deposits.
Cash and the catering sector
Cash is like the proverbial piece of string – who can say how much there may be in a business that is happy to handle money? As a result, the Taxman – or to be accurate, Her Majesty’s Revenue & Customs – is suspicious of any business that largely involves cash, hence the reason he will often focus on the catering sector.
Waste or profit?
It is not just cash that makes the Taxman suspicious – there are other issues with the catering sector that give HMRC concerns. First of all, there are wastage factors. Who can say how many pies, chips, pizzas or burgers have had to be thrown away as unsold at the end of the day – and how many have been sold for cash that didn’t go through the till?
There is also the issue that the trader might really have literally eaten some of the profits, which are taxable on the trader at the retail price.
The workforce itself is another area that attracts the Taxman’s attention. Unfortunately, the labour requirements of the sector – with unsocial hours and flexible demands that can change with the weather – are such that they will often be met as a secondary, undeclared part-time source of income by someone who has already used up all their tax allowances in a full-fime day job. In HMRC’s terminology, these people are referred to as Moonlighters, with a second job that they perform by moonlight. And then you also have ghosts…
In HMRC speak, a ‘Ghost’ is a trader who flits in, flits out and never actually registers for tax. Ghosts occur in almost every retail trade and are the bane of the registered trader’s life because, typically, as they don’t pay tax or NIC (or rates, or insurance etc) they can undercut the prices and profit margins of their more law-abiding competitors. Often – and especially around festive occasions – they have come and gone before HMRC even knew they were there.
Cash flow tests
All of this can serve to make HMRC very suspicious of anyone involved in the catering sector, which can have adverse repercussions on the trader who finds himself subject to an enquiry due to the professional cost and business disruption this can cause – let alone the sleepless nights.
There is one other unfortunate factor that needs to be thrown into the mix – in practice, the catering sector provides a very good training ground for new investigators in that it gives them a chance to carry out cash flow tests and business economics exercises.
A cash flow test is a mathematical exercise to work out the amount of cash that a business theoretically has on hand at any one point. The investigator will start with the cash on hand as shown on the business balance sheet at the start of the year, add in the takings and any money drawn from the bank and then deduct the money banked and cash spent, whether it be on purchases, wages or day-to-day expenses. If it ever comes to a negative figure – say you have cash on hand of only £550 but you bank £600 – then the investigator concludes you must have understated your takings. In this example, you would have needed at least another £50 to have banked the £600. Who knows what other cash you might have spent on yourself?
Business economics exercises
A business economics exercise is one that looks at your purchases and tries to calculate your sales. If you buy a dozen burgers and a dozen burger rolls, and you know how much the business charges for a burger in a bun, it is fairly easy to calculate the potential sales. What makes it difficult are the wastage factors, especially when the product requires a lot of preparation – for example, peeling potatoes, skinning and battering fish, chopping up salad – as well as the prepared but unsold (and unsellable) food left over at the end of the day.
HMRC recruitment patterns
Unfortunately, all of these factors come together when HMRC is going through a period of recruitment – as they are at present. Unlike other sectors, which recruit and retire staff on a regular basis, HMRC, along with the rest of the Civil Service, has become caught in what might be called the 30 to 40-year wave.
There was a massive expansion in the Civil Service at the end of World War II when servicemen and women returned home and were given jobs there. Although there were some losses in numbers through the years, many stayed for life and only came to retire in the late 1970s and early 1980s when they were replaced by another huge recruitment drive.
The 1970s’ intake is coming up for retirement now – which means that HMRC is recruiting and training lots of new investigators who are cutting their teeth on the catering sector. You have been warned.