tax investigation

[safwan]

firstly i have a restaurant i offer free drinks to customers at the end of the meal to most of my customers the inland revenue is investigating my accounts they say that the free drinks can not be allowed as advertising and promotion they are saying that its entertainment and can not be charged to accounts, secondly i put a new flooring down which replaced the old carpet they say that an iprovment to the building as oppose decorations can you offer your comments and advice please

[Bob Jones]

1 - from the limited information available - free drinks - don't agree with IR - this is not entertainment - but why have you included this as advertising and promotion - if it is as you say then it would be appropriate to include simply as purchases -

2 They may have a point if the new flooring becomes part of the building as opposed to soft furnishings.

Bob

[safwan]

thank you bob for your your comments to answer your question as to why we have not included as purchases is because the purpose of those free drinks is to entice customers to comeback
and also that they promote this out to their friends hence in theory generate more business through word of mouth.

[AvocadoK]

On the free drinks point, even if we accept that they constitute "hospitality" and are therefore generally disallowable, there is a let out under section 577(10) of the Taxes Act, which states that there is no disallowance for items which it is the taxpayers trade to provide. I generally find that HMRC have no trouble agreeing that this let out covers free drinks provided by a restaurant.
David

[wamstax]

I am not convinced as to the accountancy treatment of the free drinks and why they feature as an outgoing (unless you are including a corresponding sale in turnover. After all the expense of purchasing the drinks is already in purchases when the goods are purchased in the first place and therefore to include them in anything again would seem to be claiming two deductions for the same expense. The logical step to my mind would be to keep a record of the free drinks and that otherwise no accountancy entries would be required.

I imagine however that this has arisen from some Business Economics exercise and basicly HMRC are saying that the sale should be included and the "free" drink treated as an expense so that there is an addition when comparing accounts turnover with their exercise turnover but they are trying to disallow the theoretical corresponding expense. In truth if this is the way that they have sought to treat it then you should merely seek to discount drink purchases by the "free" element in the same way that HMRC would have to accept a discouinting of purchases for wastage etc. Hope this helps.

On the carpet point we would have to consider as Bob says if the florring becomes part of the building as opposed to F&F. Alternatively you could try running the argument that it is nothing more than replacement of one floor covering my another if it is the type of flooring that you would see as being lifted in the short term. After all most people nowadays replace carpets with the fashionable flooring as it is the flavour of the times and possibly cheaper. This is however a bit of a strained idea.

On the former if HMRC are running business economics exercises without much more to go on than their extrapolation of purchases to sales these should be looked at with a critical eye both in how matters are treated and margins that are realisticly achieved as against hypothetical ones. I assume that they have broken your records as being inadequate (and you have accepted them as being such before you embarked on giving credence to any BE approach.
regards
bill@wamstaxltd.com
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