News that HM Revenue and Customs (HMRC) are to create a dedicated team of investigators to ‘target’ restaurants suspected of evading their tax liabilities is no real surprise: the sector offers them rich pickings in terms of under-declared takings (VAT and tax on profits and tips) and non-disclosure of benefits in kind. Furthermore, breaches of minimum wage legislation and illegal working are relatively commonplace.

It is also not uncommon for a prospective vendor to offer a prospective purchaser an idea of the ‘real’ takings, due to under-declarations of income. It is unwise to rely on such representations, however, as they may not be true! Most professionals who deal in such things have a tale or two to tell about clients who were led to believe that a business they were buying was in much better shape than it really was.

When a business changes hands but does not alter substantially, HMRC may well become interested if the disclosed profits vary substantially. If the successor business ‘checks out’, there is then a good reason to believe that the vendor was being less than honest in their disclosures, and an investigation often follows. If the successor business does much better than expected, an investigation into it might also be the result as it may be an indication of money-laundering if it is a cash business.

Vendors who do become the subject of investigations regarding their business takings in the years prior to sale should take professional advice immediately. HMRC have announced that they are to increase the number of prosecutions five-fold. A successful prosecution for tax fraud can lead to an application for a confiscation order of the ‘criminal assets’ under the Proceeds of Crime Act 2002 – a heavy blow to bear which will come in addition to the usual penalties connected with filing incorrect tax returns and late payment of tax.

Although the initiative will first concentrate on restaurants in London, it is clear that HMRC will apply the knowledge gathered during this phase of the exercise when their investigations begin to target other areas of the country.