Blogs/Vlogs

The evolution of VAT reviews in the hospitality sector

11 July 2019

Roll back 20 years or so and HMRC had a variety of checks to ensure largely cash businesses in the hospitality sector were accounting for the correct amount of VAT. Local investigation teams were kept busy following up on inspections where officers had evidence to suggest there were shortfalls.

So what was it like back in the day?

HMRC had a number of statistical tests to check the records being presented were accurate and presented a true and fair reflection of takings. Third party records - accounts and stock taker records were a good source of comfort or collaboration.

If there was credible doubt to the accuracy of the declaration then a referral for testing would be me made frequently resulting in more covert checks.

And now?

What was to become a game changer was the introduction of electronic tills and the percentage of non cash transactions. This reduces the perceived risk for the Revenue. It allows them to have a full picture of the trading patterns of the business. These tills replaced stocktaker reports and have better and visible history of each transaction in effectively real time.

This data is supported by the statistical checks and other verification tools. This includes but is not limited to sector and location profiles.

So what investigation tools might be used?

Observation is simple and extremely effective. Officers may simply observe transactions without the business being aware and later check if they have been declared. This is the most simple and complete check - providing independent verification.

One comical true life example - an officer sat at the bar in a public house. The numbers had not added up on an inspection so additional checks were being made. The business was not aware the officer was present and the planned call came through advising of a ‘drop in’ visit. The officer was amused to watch one of the tills being unplugged and removed before his colleagues arrived. The manager confirmed the number of tills used (one less than observed) in interview. Ouch. As this is fraud the time limit for retrospective action by HMRC is 20 years and not the normal 4. You are now liable for the VAT under-declared and a penalty of 100% - or a criminal prosecution

Managing the inspection

As part of general risk management the tool used to prevent staff fraud and generally manage stock are useful to check and confirm the correct amount of VAT is being accounted for. Be prepared for officers to check and reconcile til reports to declarations. Explain your controls as HMRC will be interested and assured.

Don’t forget the simple things - evidence to support VAT recovery; all VAT recovery must be for business purposes and not blocked; full audit trail.

These changes help businesses. They give compelling corroboration to the declarations made, help HMRC ensure VAT is accounted for and remove distortions of competition between honest and dishonest traders.

If you have any queries or would like to discuss this topic further, please contact your local UHY adviser.

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