Catering Industry Bulletin
‘Staying out of Trouble’
The smoking ban has hit most of our pubs extremely hard. Yet at this time HMRC, both the old Revenue and the old Customs, seem to be stepping up their efforts to squeeze more tax out of this sector.
Private Consumption
The tax case of Sharkey & Wernher established that a taxpayer takes assets out of a business at Market Value. This case was surprising in that it had been a long established principle that a person cannot make a taxable profit trading with himself. The reason for the judgement was that the asset taken out of the business was a racehorse and there was no reasonable method of establishing cost.
Quite extraordinarily HMRC have concluded that the Market Value of a bottle of wine removed from a Restaurant cellar to be consumed by the proprietor in his own flat (or perhaps in the kitchen) is the price at which the wine is sold in the Restaurant. This is logical nonsense. The bottle of wine in the cellar has a market value equal to the wholesale cost, it is only when it is consumed ‘at table’ that the Market Value becomes that on the Restaurant price list. For a proprietor who drinks five bottles of wine a week the difference in the private consumption adjustment might be £2,500 per year,
| 5 bottles at £5 x 50 weeks | = | £1,250 |
| 5 bottles at £15 x 50 weeks | = | £3,750 |
| £2,500 | ||
| the tax on this over 6 years could thus be £6,000 | ||
| £2,500 x 40% x 6 | = | £6,000 |
and with penalties and interest the HMRC inspector will thus seek to collect an extra £10,000 from the hapless restauranteur.
We are so incensed by this approach by HMRC that we have appealed our case to the special commissioners.
In the meantime we would advise all our clients to open a private account with their alcohol suppliers, to buy alcohol for private consumption through that private account and to pay that private account from their personal bank account, (a kind of specialist tax court)
Proof of Turnover for VAT
Most of you will know that VAT teams can and do occasionally visit Restaurants undercover and count customers for an entire evening / day. They then ask for takings records for that day, identify any under declaration, multiply by 365 days then by 6 years then add interest and penalties. This can be enough to bankrupt a restaurateur. Although we can advise on strategies to minimise the impact of this type of investigation, in our experience, it is pretty much impossible to successfully defend a Restaurateur who has been under declaring takings.
We have recently come across VAT Inspectors using a new and subtle analysis for identifying potential under declaration of turnover. It goes like this:
The inspector adds up all the drinks costs on which VAT has been claimed. The inspector will then work out a mark up on drinks sales (say x 3). Finally they will look at the proportion of total sales to drinks sales on the customer bills (say x 4). They can thus do a simple calculation.
| Drinks cost per | Mark Up | x | Drinks Proportion |
| VAT working paper x | (3) | (4) | |
| = Expected Outputs |
Again this is difficult, although not impossible, to resist. What I fear this technique might do is flag up for HMRC those Restaurants that warrant a full-blown visit by the undercover team.
Our main advice on this is ‘don’t suppress income’. If HMRC find suppressed income, the tax and penalties they charge will swamp any savings you may have made in the past.
‘Rolling it around’
We have seen an increasing tendency for some of our clients {taking advice from the proverbial ‘man in the pub’ or unqualified ‘consultants’ perhaps} to want to change the legal entity owning their establishment every few years.
It is quite legitimate for a business to be incorporated, to be sold, and perhaps (in the next few years especially) to be disincorporated. However, moving from one member of the extended family to another or one Limited Company owned by the extended family to another is a dangerous game indeed.
Consider a hypothetical inspector finding suppression of income but unable to go back more that 2 years because the ownership changed. On further investigation the old owner was the sister of the current owner, and three years before that the business was sold out of a company owned by the current owner and partner. There is no evidence of money actually changing hands.The inspector could put this case to a judge that the proprietor and his family have systematically conspired, carried out a tax fraud and covered this up with false accounting. The judge is very likely to think that prison sentences are appropriate, for wives and sisters who were involved as well as the men involved!
Whilst considerations of incorporation, disincorporation, partnership and business sale should always be borne in mind, we strongly advise clients not to change the legal entity that owns the business without extremely good reason.
In any event, formal business valuation should be undertaken and proper market value consideration be seen to be paid by the purchaser.
All the signs are that HMRC are going to be looking very closely at the restaurant sector in the future so we strongly advise you to resist the superficial attraction of income suppression and ‘rolling it around’.
Disclaimer
Most of the information contained in this bulletin is of necessity greatly oversimplified. We are trying to bring to your attention tax planning and business management opportunities. However, you should not take action based upon this leaflet without obtaining specific professional advice.
Whether you are a client or not, if we can provide further help or advice concerning any of the matters covered here, please do not hesitate to contact us.
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