Due to the nature of the hospitality and foodservice industry – with its cash tips and untraceable food items that may have either been sold for taxable cash or thrown away as a loss – the HMRC likes to keep a close eye on the sector. Sumit Agarwal, accountant at DNS Associates, summarises the elements that operators need to address in order to maintain favour should any investigator come knocking at your door.
The hospitality and foodservice industry has been targeted by HMRC in the past and still remains a target for investigations into tax evasion. One of the main reasons for this is that, alongside the usual business factors of payroll, workplace pensions and VAT, the hospitality sector also has to declare the supplementary income provided by staff tips. As tips are most likely given in cash, HMRC’s suspicions are aroused as to whether they are all being declared.
Ideally an accountant will work with you to ensure compliance and to make the most from tax planning. Hopefully the accountant you choose will also offer cloud accounting, as this makes bookkeeping and accounts both immediately accessible and considerably less complex.
Name your troncmaster
In this sector, staff as much as business owners are still the focus of interest for HMRC regarding possible tax evasion, so be warned.
Ideally all establishments should have a dedicated troncmaster who is responsible for dividing tips among staff, waiters and the kitchen. The designated troncmaster should keep records, and these records should be handed to payroll when appropriate.
Some recipients of tips choose to handle their cash tips personally. In this case, the recipient is responsible for declaring all money they have received as tips on a self-assessment tax return.
Payroll and PAYE
If you employ anyone over the age of 22 and below the pension age and they earn over £10,000 a year, you are legally obliged to offer a workplace pension.
When running payroll, remember that tips need to be taken into consideration. PAYE must be worked out on the total amount of tips deemed to constitute taxable supplementary remuneration.
The VAT minefield
If your business is VAT registered (over the VAT threshold of £81,000 or voluntarily) you will already know that some foods are zero-rated and some standard-rated.
Cakes are zero- and biscuits are standard-rated at 20%. Which raises the question, what is the difference between a cake and a biscuit? According to UK case law, the main difference is that cake gets harder as it goes stale, while biscuits get softer. McVities successfully argued this premise when HMRC tried to impose VAT on Jaffa Cakes, deeming them biscuits rather than cakes.
Eating or drinking anything – including cakes – in a café or restaurant attracts a VAT charge. In addition, do not forget that food served above room temperature – whether to eat in or take away – attracts VAT.
The quality of the accounts of any business will directly affect its success, but there is research to suggest that this is particularly true for operators in the hospitality sector. With this in mind, it cannot be urged strongly enough that operators work with an expert accountant to ensure their accounts are in order.
Remember you are working in an industry that attracts scrutiny from HMRC and that, at all times, your finances must be in order from payroll to tronc records, financial reporting, quality of suppliers and terms of payment, overheads monitoring, stock-taking, paying bills, knowing the financial status of the business in real time, and tax planning.
Horses for courses
It is highly recommended that you select an accountant with expertise in the restaurant and leisure industries and preferably one that offers cloud bookkeeping and accounting software as part of its services.
DNS’s cloud accountant software – Nomisma – is provided free to all clients, giving immediate, press-of-a-button access to records and reports on sales, purchases, overheads, stock, POS, profit and loss, as well as helping to manage payroll and VAT.
Sumit Agarwal is a specialist accountant and tax adviser helping restaurant owners, hotels and other hospitality businesses to manage their accounts. He won the British Business Forum’s Young Entrepreneur Award in September 2012, presented at the House of Commons by MP Vrinder Sharma.
www.dnsassociates.co.uk is an award-winning accounting, tax planning and consulting services practice with a presence across the UK. The company specialises in services for owner-managed businesses with expertise in the hospitality, retail and leisure industries among other business sectors.