The Top 3 Mistakes You Are Making That’ll Expose Your Food Business To An HMRC Audit.
Are you exposing your food business to an HM Revenue and Customs (HMRC) Audit with these 3 rookie mistakes?
HMRC tax audits can be stressful for any business, and maybe you’ve been thinking about it for a while.
Here’s the thing.
HMRC conducts audits at random, but these mistakes can put your food business in the limelight and keep you awake all night.
In this article, you’ll not only learn about the mistakes but also learn how to minimize your chances of coming under the glare of the auditor’s spotlight.
But first…
What is an HMRC Audit?
HMCR tax audits are tax investigations where HMRC has reasons to believe you are either making errors or deliberately concealing income. Either you file tax late, pay late or make errors that need correcting.
The tax officer visits your office to review your transactions to ensure what you submit can be verified in person.
It includes a full assessment of your business from your employees to your equipment. They also check your tax records and other documents or systems that relate to your business management.
Before the audit, you’ll receive a notification letter about the audit and scope – whether they’ll audit the entire business or just a single part such as tax records from the last 12 months.
Such records include;
- The tax you pay
- Business accounts and tax calculations
- Company tax return
- VAT returns and records if you’re VAT registered
- Self Assessment tax return for the year
- PAYE records and returns if you have employees
That said, let’s look at the top 3 mistakes you could be making, that’ll attract the taxman. Because when you know them, you can avoid them a hell of a lot easier.
Mistakes to Avoid in 2020
- You don’t keep receipts and invoices.
HMRC checks on how you keep your records, how you fill your tax returns, and if you pay the right amount of time and on time.
If your business records are inadequate, you may have to pay a record-keeping penalty. However, before that happens, HMRC will give you a chance and more time to bring them up to standard.
HMRC will carry out a followup, but if they still find inadequate records, then they’llapply a penalty. The first offence attracts a penalty of £500, or £250 if you’re in your first year of trading.
But if HMRC finds out that you deliberately did not keep your records, then they’ll apply a penalty of £3,000 or reduced to £1,500 if only some records were missing.
- Paying people in cash
In July 2016, the government introduced new laws regarding the employment of illegal immigrants in the UK.
You can end up paying severe fines and penalties if found guilty and more so failing to check your workers’ status.
Here’s the thing.
Maybe you have some people who come to your restaurant from time to time to help with some minor jobs and pay them in cash.
This may expose you to employ an illegal immigrant unknowingly and could attract a fine of up to £20,000 for each illegal worker or a prison sentence of up to 6 years.
- Not being aware of the VAT threshold.
Value Added Tax (VAT) is one of the things small businesses should be aware of, especially the VAT threshold.
So, what is the VAT threshold?
In the UK, the VAT threshold is £85,000 of your annual business turnover. You must register for VAT if your annual sales exceed this amount within 30 days and the figure keeps changing.
Use accounting software to help you keep an eye on your turnover, and even set alerts if you’re approaching the VAT threshold.
If your turnover exceeds the £85,000 threshold, then you have to register for VAT, but you can also voluntarily register before you hit the mark.
So, what happens if your turnover exceeds the VAT threshold?
If that happened last month, then you have 30 days from the date to notify HMRC and register for VAT.
You’ll then pay the VAT due and pay the penalty based on the VAT and how late you are with VAT registration. Also, note that VAT will still be payable from the date VAT registration was necessary.
What if you didn’t charge VAT on goods and services from that date? You’ll still have to pay VAT which you should have charged.
HMRC could also charge you with failure to notify penalty, late registration penalty and possibly civil evasion penalty.
HMRC calculates your overdue VAT payment as a percentage of your overdue VAT payment.
- 5% if you should have registered within the last 9 months
- 10% if you delay your registration for more than 9 months but less than 18 months
- 15% if you delay your registration by more than 18 months.
- The minimum penalty is £50.
Other issues that could subject you to an HMRC Audit are;
Forgetting to get all the food and drink licenses
There are several licenses that you require to run your restaurant business.
- Alcohol license allows you to sell alcohol that must be consumed at the point of sale. You can obtain it at your local government website.
- Food hygiene certificate – This certificate proves that you are aware of and operate under the appropriate food hygiene and health and safety regulations.
- PRS for Music license– you need a legal license from relevant copyright owners (PRS For Music) if you play music for your customers.
- Public liability insurance – It protects your business if your customers suffer personal injury or property damage because of your business. The insurance covers all legal expenses and compensation claims.
- Building permit – If you plan to add to your existing premise or build a premise.
- Food premises approvals – If your food business handles fish, meat, eggs or dairy products, then your local council must inspect and approve your business.
Paying yourself as a salary to reduce the profits hence reduce the tax you owe
Salaries are the most known ways of the remuneration if you’re a business owner. If your food business pays salaries, it will operate via the PAYE scheme and report to HMRC through real-time information system (RTI).
If you’re operating your food business via a limited company, it’s worthwhile considering a small salary as part of your overall remuneration package.
But a sole trader, you are not directly employed and don’t receive a salary in the traditional sense. So how do you pay yourself and pay any tax due?
Pay yourself based on personal drawings from your business and pay Income Tax and National Insurance Contribution based on the profits your business makes.
So, always keep records of any personal drawings from the business to pay yourself. It helps you stay on top of your bookkeeping and helps to calculate your profits.
You do not have accountant representation.
You have a large business but don’t have an Accountant to represent you and do your accounts.
Accountants have many roles, but one surprising thing an accountant can do for you is reduced chances of HMRC investigating your business, simply by representing your business.
Even though having an accountant does not guarantee honesty, using accredited services helps boost your trustworthiness with HMRC.
A business owner managing their business accounts, especially when the business is lard could potentially indicate either of these;
- They are making mistakes due to a lack of accounting knowledge and experience
- They didn’t want a third party to see their finances.
So, to ensure neither of these is happening, HMRC may launch an investigation to the effectiveness of your self-management of business accounts actually is.
The secrete is if you run a large and highly profitable business – a business that should have an accountant managing your finances, then get an accountant to handle your business finance.
You are not paying yourself as a Director.
By now you must have noticed, that most triggers of HMRC Tax Audit are something being out of place. Directors earning less than employees or not paying yourself is one such piece of suspicious activity.
A director not paying himself, taking less pay than employees or even the same amount could indicate that he is pulling profits out of business through tax avoidance schemes.
It takes a short time for HMRC to clock onto these activities and starts up a tax audit to ensure you’re really the selfless person you appear to be.
A simple solution here is to maintain the status quo. All businesses have hierarchies determined by salaries. If you want to avoid the HMRC tax audit, ensure you’re paying yourself and earning more than your employees.
If you still want to pay them more, then work out other methods of rewarding them, such as extra benefits.
Are you ready to get smarter with the taxman?
HMRC tax audits are not an experience you want to endure.
They are expensive, time-consuming and stressful – lasting about 16 months and costing roughly £5,000 in accountancy fees.
They’re a nightmare, not because you have done anything wrong but because you’ll be forced to manage your side of the audit.
Unfortunately, you may not totally eliminate the possibility of a tax audit, but HMRC will occasionally conduct random audits without any likely trigger.
However, while you cannot guarantee that they’ll not investigate your business, you can certainly take steps to minimize the possibility.
It’s never that simple, though.
So, choose a mistake to fix today. Fix another one tomorrow.
And before long, you’ll be the one raving on and on about the importance of tax compliance.
