In this blog we’ll use a recent case to look at what HMRC does when reviewing a franchisee’s VAT records. We’ll show you why a VAT visit shouldn’t scare you.

Getting a visit from the taxman is never fun. They are at your place because they think you’ve been naughty and they want to catch you.

They thought the staff at the South Shields branch of Subway had been very naughty. They thought that the shop was under recording its eat in sales and sales of hot takeaway food. Don’t ask why, but those sales include VAT whilst sales of cold takeaway food don’t.

An HMRC officer visited on a few lunchtimes over a two week period. He did his own analysis of the sales he observed.  

From that analysis, HMRC charged the franchisee for under recorded VAT of £47,875 for the previous 3 years.

That is quite an assumption on the basis of three lunchtimes’ worth of observations. The Subway franchisee appealed to the VAT tribunal using three arguments:

  1. Three visits were not enough to be representative.
  2. Each visit was at lunchtime so ignored evening and weekend sales.
  3. The visits were in the autumn, so it was colder, so there were more sales of hot takeaway food.

The VAT tribunal judge agreed and ordered the cancellation of the VAT charge. There was no evidence of deliberate wrongdoing by the franchisee staff. Subway head office programmed the tills so they were likely to be accurate.

The only remaining possibility was that the sample used by HMRC was too small and limited. It was wrong to use it to compare to earlier VAT returns.

This type of extravagant analysis by HMRC is very common. They get an idea in their heads and try to find evidence to support that idea. If you find yourself in the same position as Subway – fight! You understand your franchise’s trading patterns and sales mix better than anyone. Use that knowledge to rubbish HMRC’s arguments. They don’t expect that and don’t like it.

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Chris Martin

Chris Martin is a chartered accountant and business advisor and has been helping franchisees create and grow wonderful businesses for over 20 years. He is a published author and has written extensively on franchisee tax issues. He passionately believes that whilst franchising is a deservedly successful business format, franchisees are often let down by their franchisors’ failure to offer support and guidance regarding the financial side of running the business. This leaves franchisees frustrated, overwhelmed and unable to grow their businesses to the extent they should. Chris has developed simple systems, support and guidance to ensure franchisees create businesses that provide them and their families the lives they so richly deserve.