If your business has a lot of cash transactions, you are more likely to be a target for a VAT or tax inspector. HMRC takes the view that a business is less likely to correctly record cash than bank or card transactions.
The HMRC database includes extensive information on all types of business. One of the first, and simplest, check made is to compare your declared gross profit margin with other, similar businesses. If your gross profit looks low, you are likely to be the subject of more detailed checks. When we prepare accounts we will tell you if we think you are likely to fall outside the parameters.
They don’t come right out and ask you for information. They are likely to watch and visit your premises without declaring who they are. They will watch customers and try to see how much they paid, how they paid and the time. This is particularly relevant for cafes, coffee shops, restaurants and takeaways. All the time they are collecting and recording information and this may go on for several weeks.
We had a case a few years ago when an HMRC inspector asked one of our clients, a fish & chip shop owner, how many portions of chips were obtained from a sack of potatoes. Luckily the correct answer was given (or pretty close) because the inspector then admitted that he and several of his colleagues had visited the shop and purchased chips. The chips were weighed and they knew the size of the portions and how many were in a sack. They knew how many sacks had been bought so could calculate the anticipated sales of chips. Fish purchases were easier to track so the inspector had a very good idea of the turnover before even starting an official enquiry.
You might think this is a bit sneaky, but similar practices are carried out every day. Do you definitely know that your last customer, or the one before, was not an HMRC inspector?
Finally comes the day when they decide to make themselves known. Often they will arrive just before closing time and ask to see your cash up process and look at till rolls and other records.
Note that you don’t have to provide documents and information at this point. You can (politely) refuse and say that you are happy to help but wish to consult your accountant first.
HMRC inspectors tend to believe their own conclusions when, in fact, there could be many legitimate reasons for apparent differences. Rather than get into arguments, it is better to defer a meeting until you know exactly what they are asking and have had time to prepare.
Over the years we have dealt with quite a few of this type of enquiry. If someone has been deliberately concealing cash and HMRC can prove it, unfortunately “it’s a fair cop”. However, in a lot of situations, HMRC’s conclusions are wrong and we have been able to demonstrate this and have enquiries dismissed.
No one likes an enquiry, be it for tax, VAT or payroll, so the advice is to keep good records, particularly where cash is involved. We will be pleased to discuss your accounting and bookkeeping and help you put systems in place to reduce the risk of enquiries or, if they do occur, deal with them quickly and effectively.
Should you wish to get in contact with us regarding this blog please contact us on (01509) 816150 or by the contact form below.
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