Taxman eating away at tax evasion in restaurant sector

HMRC is ramping up a campaign targeting restaurants and takeaways as financial stress makes tax evasion more tempting for smaller operators, according to analysis from BDO

A quarter of cases on the HMRC’s major defaulters’ list come from this sector with restaurants and takeaways making up 26% (200 of 775) of businesses ‘named and shamed’ by HMRC as ‘deliberate tax defaulters’ since the start of the publication of quarterly lists in December 2017.

Recent examples include a Chinese takeaway business from Bangor which defaulted on taxes worth over £158,000, between 2012 and 2016, and faces fines of £77,000. An Indian takeaway in Luton defaulted on taxes worth £413,000 and faces fines of £310,000, while a pizza restaurant in Middlesbrough defaulted on tax of £60,000 and face fines of £27,000.

Restaurants are more likely than most businesses to under-declare income due to the high volume of cash transactions they process, claims BDO. With margins now under intense pressure in the restaurant industry, the temptation to improve profits by avoiding VAT or payroll taxes has risen.

HMRC is also aware of an electronic card payment system used by some restaurants and takeaways that does not leave an ‘audit trail’ and could facilitate tax evasion.

HMRC has been particularly active in the pursuit of lost tax through tips, which can be difficult to monitor.

If a restaurant is operating a tips scheme incorrectly or misreports its tips, HMRC can seek any unpaid tax along with interest and penalties. A failure to comply with regulations surrounding the reporting of tips could result in a business being investigated, warned BDO.

Dominic Arnold, partner at BDO, said: ‘HMRC’s crackdown on tax evasion and avoidance continues with gusto and remains high on the government’s agenda. This is a way of both reducing the tax gap as well as gaining public trust in the fight against tax evaders.

‘HMRC has a range of taskforces now focused on investigating the restaurant industry. The use of taskforces has proved very effective in the past and businesses need to be aware HMRC is going to continue to throw this kind of concentrated effort at the sector.’

This is one of number of targeted anti-avoidance campaigns being run by HMRC.

An HMRC spokesperson told Accountancy Daily: ‘We will continue to make sure that every business, no matter their size or industry, pays all the taxes due under UK law and we won’t settle for less.

‘Tax avoidance doesn’t pay. People can end up paying more than they were trying to avoid in their misguided attempts to save money.’

Accountancy Daily