Would you like tax with that?
Would you like tax with that?
We share our view on Inland Revenue's new campaign aimed at small business owners in the hospitality sector.
“Clients talk to me of seasonal conditions and averages. I abhor averages. I like the individual case. A man may have six meals one day and none the next, making an average of three meals per day, but that is not a good way to live.”
- Louis D. Brandeis
It’s in this quote that the American lawyer and jurist points to the perils for the individual of a blanket application of statistical averages. The sentiment is worth considering in a world where tax authorities increasingly rely on data and statistics to inform their conclusions.
In recent weeks, Inland Revenue began a new campaign aimed at small business owners in the hospitality sector. While Inland Revenue’s focus on hospitality businesses is nothing new, with two recent successful criminal prosecutions under its belt, the campaign signals the start of a new approach.
In a recent email to accountants and tax agents, Inland Revenue indicated its plans to begin contacting cafés, bars, restaurants and takeaway businesses. The reason for the contact? To thank those who have kept their books in order for their good work. As Inland Revenue puts it, “better books, better business, better burgers”. And for those that Inland Revenue suspects have not been so diligent? They should expect a knock at the door from Inland Revenue officers.
The implication, of course, is that Inland Revenue already knows which businesses are under-reporting their income. But how can it know?
Inland Revenue now has many tools at its disposal to red-flag businesses it thinks are supressing income, paying under-the-table wages or under-paying GST. What’s new is its ever-growing reliance on data.
While in the past Inland Revenue might have relied on more traditional audit activities to identify non-compliant businesses, its use of data has become more and more sophisticated. It can now identify businesses it thinks aren’t paying enough tax through analysis of statistical averages.
For hospitality businesses, Inland Revenue uses data to do statistical comparisons between establishments. It might compare businesses with a similar turnover, similar categories of shops (for instance, specific foods), a similar physical size, geographic locations or similar demographics. And Inland Revenue can do so virtually at the touch of a button.
The problem is that Inland Revenue’s newfound reliance on statistical data can often prove to be a thorn in the side for compliant businesses. The assumption is that all businesses should follow the same yardstick measures when at an individual level there are often numerous reasons why a given business might not.
While the reasons for any deviation from statistical averages can and should be presented to Inland Revenue, when push comes to shove if the data shows that cash takings are low when compared with a similar or nearby business, the burden of proof falls on the business to show why Inland Revenue’s statistical conclusion is wrong. In my experience, in many cases where Inland Revenue concludes that a business has under reported cash income, it is very difficult to disprove.
All of this is made worse by the fact that if the business disagrees with the Commissioner’s conclusion, often the only pathway to resolution is the formal tax disputes process. Given the disputes process takes, on average, 635 days to work through, it’s easy to see how a small café or takeaway shop can get burnt out by the time, cost and interruptions.
And, if Inland Revenue is unwilling to accept the business’ reasons, or the business is unable to devote the time and money required to dispute the conclusion, it could result in significantly more tax to pay, or at the extreme, criminal prosecution.
So what should you do if Inland Revenue gets in touch?
As experts in tax disputes and with experience in hospitality audits, we can help you to manage the process. If you do have unreturned income, we can help you make a voluntary disclosure to Inland Revenue to minimise any penalties and interest that might apply.
And if you have done the right thing, we can help you manage Inland Revenue’s approach, address their concerns at an early stage and let you get on with your business with minimum interruptions.
After all, who will be cooking the burgers while you deal with Inland Revenue?
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