People eating around a restaurant table

Case Study: Tax Investigations in the Food & Drink Sector

Pubs, bars and clubs, as well as cafes, have always been popular targets for HMRC to investigate. This
is primarily because these businesses are deemed to be cash based enterprises, with plenty of scope and opportunity for record keeping errors and tax mistakes. Subscribing to our Tax Investigation Service means when the seemingly inevitable happens, our professional fees to assist you will be covered.

Less than entertaining

HMRC launched an enquiry into an established town centre pub. The investigation initially focused on business expenditure and, having visited the business premises to check the records being maintained, the inspector was able to successfully argue that the declared net profit figure was incorrect.

Another area of concern focused on the payments being
made to entertainers hired by the pub. Despite reassurances from the publican, alongside evidence showing the entertainers had been paid from recorded takings, the inspector remained suspicious and began a detailed analysis of the business
bank account.

Whilst the inspector conducted the review, the publican’s health deteriorated with the constant stress of the enquiry. Eventually, the inspector was finally satisfied the entertainers had been paid correctly and a final settlement of £5,000 was agreed.
The defence costs for the enquiry were another £4,000.
Unfortunately the publican had not subscribed to the Tax Investigation Service and had to pay the full £9,000, rather than just the £5,000.

Family Values Challenged

A family owned pub became the subject of a full enquiry when HMRC questioned the accuracy of the accounting records. The inspector’s main line of questioning was based on a business economics exercise, which made sweeping assumptions about portion sizes and the number of covers.

The purpose of the exercise was to challenge the pub’s gross profit margin. The inspector concluded over £80,000 had been omitted from the accounts over a three year period.
The publican found the inspector to be stubborn and unresponsive to counter arguments about the validity of the assumptions made and it took a long time for his arguments
to prevail.

However, his persistence paid off and the inspector’s flawed arguments were exposed. The enquiry finally settled without any adjustments required to the accounts.

The successful outcome was not without cost though. The defence fees amounted to over £6,000 because the inspector had been so intransigent.

The lesson here is clear. Your business records may be robust and accurate, but that does not stop a tax inspector from seeking alternative methods to argue differently. Responding to this type of tactic is time consuming and fee generating, so subscribe to our Tax Investigation Service for peace of mind.