HMRC Enquiries – beware if you have a cash business

Even in this digital age some businesses remain heavily reliant on cash transactions. HMRC views these as high risk and as a result targets cash businesses with VAT enquiries, using special techniques to justify investigating them.

Nicola Roby, Director at CHW explains the issues and how you should respond if challenged.

Cash problems

Market traders, cafés, and takeaway food outlets are just a few of the types of business that make a significant parts of their sales in cash. Cash businesses run a greater chance of being subjected to a VAT enquiry as 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.

HMRC has powerful methods for identifying issues.

Mark-up models

HMRC compares the records of businesses 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 that business.

Of course, differences aren’t necessarily evidence of wrongdoing, merely an indicator, but it raises warning flags especially if your business makes a lot of cash sales.

How will HMRC react?

If they spot something they view as unusual, 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 may 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.

You don’t have to provide documents or information at this point. You could politely refuse and say that you’re happy to co-operate but wish to consult your accountant first.

Justifying discrepancies

There could any number of legitimate reasons why your takings might differ from HMRC’s expectations.

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

What is HMRC makes a surprise visit?

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, workers, banked, etc.

For further advice contact us.


This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.

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