Less than entertaining

HMRC launched an enquiry into an established town centre restaurant. The investigation initially focused on business expenditure and, having visited the business premises to check the records being maintained, the inspector was able to successfully argue that the declared net profit figure was incorrect. 

Another area of concern focused on the payments being made to entertainers hired by the restaurant. Despite reassurances from the restaurateur, alongside evidence showing the entertainers had been paid from recorded takings, the inspector remained suspicious and began a detailed analysis of the business bank account.

Whilst the inspector conducted the review, the restaurateur’s health deteriorated with the constant stress of the enquiry. Eventually, the inspector was finally satisfied  the entertainers had been paid correctly and a final settlement of £5,000 was agreed. The defence costs for the enquiry were another £10,000.

Unfortunately the restaurateur had not subscribed to a Tax Enquiry Service and had to pay the full £15,000, rather than just the £5,000.

Hotels, restaurants and pubs, as well as cafes, have always been popular targets for HMRC to investigate. This is primarily because these businesses are deemed to be cash based enterprises, with plenty of scope and opportunity for record keeping errors and tax mistakes. 

Family values challenged

A family owned hotel became the subject of a full enquiry when HMRC questioned the accuracy of the accounting records. The inspector’s main line of questioning was based on a business economics exercise, which made sweeping assumptions about the hotel.

The purpose of the exercise was to challenge the hotel’s gross profit margin. The inspector concluded over £80,000 had been omitted from the accounts over a three year period.

The hotelier found the inspector was reluctant to accept counter arguments about the validity of the assumptions made and it took a long time for his arguments to prevail.

However, his persistence paid off and the inspector withdrew his arguments. The enquiry finally settled without any adjustments required to the accounts.

The successful outcome was not without cost though, with the defence fees amounting to over £10,000.

John McAuslin

Tax Partner

John McAuslin

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Wendy Ramsay

Tax Investigations Senior Manager

Wendy Ramsay

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