HMRC targets cash businesses for investigation

Even in this digital age some businesses make mainly cash transactions. HMRC views these as high risk and uses special techniques to justify investigating them. What are they and how should you respond if challenged?

Cash problems

Market traders, cafés, and takeaway food outlets are just a few of the types of business that make a large part of their sales in cash. They therefore run a greater chance of being subjected to a VAT enquiry. HMRC’s view is that either by mistake or design cash transactions are more likely to not to be recorded properly in the business records. It has powerful methods for checking.

Mark-up models

HMRC compares your records with its extensive data on profit margins, turnover, mark-ups, etc. It uses clever software to identify apparent discrepancies between figures in a business’s accounts and those it expects to see for the type and location of your business. Of course, differences aren’t evidence of wrongdoing, merely an indicator. However, it raises warning flags especially if your business is likely to make a lot of cash sales.

What happens next?

HMRC might bide its time and review the next accounts before deciding whether to start an enquiry or it may be more proactive and take immediate action.

It might carry out covert observation of your premises. For example, in the case of a takeaway restaurant VAT officers will count the number of customers and, if possible, how each pays. It will make observations on different days to get a good idea of how your business runs. An unannounced visit to your business might follow. They’ll ask you to hand over till rolls and other records showing the day’s takings. They’ll compare these with their observations.

Tip. You don’t have to provide documents or information at this point. You should politely refuse and say that you’re happy to co-operate but wish to consult your accountant first (see The next step ).

Justifying discrepancies

HMRC officers tend to consider the conclusions they make from observations and follow-up calculations as hard facts when actually there could any number of legitimate reasons why your takings might differ from their expectations. Not only that but it’s not uncommon for HMRC to make schoolboy errors in its calculations. Therefore:

• check its workings for basic errors such as overstating the hours of business, incorrect mark-ups, not accounting for shrinkage, etc; and
• consider if there were reasons why their observations regarding the level of trade or cash taken might not be representative. For example, you were running a sales promotion at the time.

Prevention better than a cure

As HMRC is reassured by good record keeping, have a system for checking cash sales against cash banked. For example, if you remove cash to, say, pay a supplier or casual staff, record this. You should be able to tie up cash banked with takings. If there is a material difference you can’t explain keep a note of it.

If HMRC makes an unannounced visit don’t provide documents or say too much until you have spoken to your accountant. Good record keeping is your best defence. For example, have a system so you can show where all cash received has gone, e.g. to pay suppliers, banked, etc.