Case Study: Tax Investigations in the Hospitality Sector
An independent analysis of HMRC enquiry data by the Institute for Fiscal Studies (IFS) has revealed nearly 60% of businesses, within the hospitality sector, owe extra tax after an investigation. That alarming success rate is one of the reasons why we encourage our hospitality clients to subscribe to our Tax Investigation Service.
The hospitality industry is a lucrative target for HMRC because of the scope for businesses to make mistakes not just with their tax, but also with their VAT and PAYE liabilities too. After all, the industry employs a lot of people.
If HMRC considers the potential risks to be sufficiently high, an unannounced visit may be carried out on a business by a combination of HMRC officers, or as part of wider taskforce activity, where HMRC targets a geographical area of the UK for closer scrutiny
Guest house
A guest house was subjected to an investigation as part of an HMRC taskforce focused on holiday accommodation. As is common practice, the tax inspector requested the submission of business records and supporting information, to explain how the accounts figures declared on the tax return had been calculated.
The investigation then took an unexpected turn, when the inspector decided to focus on the personal wealth of the guest house owners. The inspector asked for access to their private financial records, including their bank statements, because of perceived concerns about their ability to fund their lifestyle based on the profits being generated by the guest house.
Despite misgivings about the validity of the inspector’s justification for the personal paperwork, it was submitted alongside a detailed explanation of why the income levels were commensurate with the partners’ lifestyle.
Finally, over a year later, the inspector was forced to close the enquiry after admitting no amendments were necessary to the original return. Even though the enquiry was successfully concluded, the professional fees were in excess of £4,000.
Restaurant
In this example, a restaurant received an enquiry notice and spent several months simply providing the inspector with information.
Private bank account statements were requested because they contained significant business activity and the inspector demanded a meeting, without providing an agenda beforehand. The meeting invitation was refused, so the inspector decided to ask a whole series of questions in a letter covering all manner of issues including cash handling, motor expenses and wages expenditure.
All of the questions were answered, although an error was uncovered concerning the treatment of tips. Over £1,000 of cash tips had not been declared. A thorough defence was mounted and it was demonstrated the error had been made due to late night bookkeeping when tiredness had set in.
After significant arguments back and forth with the inspector, the enquiry was eventually settled after four years. A small one-off payment was made to HMRC, but professional fees of £14,600 had built up.
According to the analysis by the IFS, the average amount owed by a hospitality business at the end of a tax investigation is £4,500.
As these case studies show, substantial professional fees can be incurred during an enquiry, on top of any additional tax liability. The sensible precaution is to subscribe to our popular Tax Investigation Service to ensure those fees are covered.
