Test Purchases

HMRC can carry out what is known as Test Purchases, which fall under the term “Covert Surveillance” if they suspect that a trader is under-declaring their takings. Test Purchase exercises generally take place in restaurants or takeaways, but they are certainly not limited to these types of business. Hair and beauty salons are also amongst those at risk of Covert Surveillance, along with any other business where a customer may spend a reasonable amount of time.

Using a restaurant as an example, a Test Purchase will involve (in most cases) two HMRC Officers turning up to the business’ premises, and behaving as though they are genuine customers. They may book a table, or they may not. They will order a meal and drinks, just like any ordinary customer, and may even leave a tip, but they will always pay in cash. The visits will also normally be staggered to allow an HMRC presence in the restaurant throughout the evening.

Unlike any of the other genuine customers, the HMRC Officers will be mentally noting everything down from their visit. This includes, but is not limited to:

• Number of tables and chairs
• Number of customers and the groups they are in
• Number of staff
• Number of tills or PDQs, and which one(s) are used
• How cash is handled
• Any orders that can be seen or overheard, including takeaway orders if applicable
• Any payments that can be seen being made, and whether they are cash or card
• The meal and drinks the HMRC Officers ordered, and how they paid for them
• The timings of any particular event

They may even draw a retrospective sketch of the floorplan to aid in their descriptions. Once the HMRC Officers have finished their Test Purchase, they will (or should) immediately complete their notes to make them as contemporaneous as possible. Obviously, they cannot do this during the test purchase as it will likely arouse suspicion! Because of this however, there will always be a delay between the Test Purchase being undertaken, and the notes being finalised. This should always be noted.

There are understandably a number of risks within the restaurant trade, but what HMRC are looking for in these situations becomes apparent when they open up a compliance check, or turn up to do an unannounced visit (Part 2 of Schedule 36 Finance Act 2008), usually at the end of a night when trading has finished, the owners are tired, and are unaware of their rights. HMRC’s main intention is to check if any of the meal slips and observations they noted down are missing from the business’ records or return. If anything, it is normally the cash sales which are not recorded in these circumstances, as the audit trail is much weaker.

If anything is missing from what is written in the HMRC Officer’s notes, this gives HMRC licence to produce their own (often fantastical) Economics Models as to what they believe the business “actually” turned over. Although time and again we have proven such Models to be crude, excessive and ineffective, it is often a requirement to remit the case to Tribunal to do so. The Caseworkers rarely like to hear that their Models are not fit for purpose.

What is Covert Surveillance?

Covert Surveillance is not in itself covered by the Regulation of Investigatory Power Act 2000 (RIPA), but under the Human Rights Act 1998 and the Commissioners for Revenue and Customs Act 2005. As such, this offers HMRC only limited powers when it comes to recording information. They are able to conduct:

• Repeated walk by, drive by or visit to a business to monitor, for example, opening times
• Test purchases
• Test eats
• Observing cash handling procedures
• Counting staff and customers
• Observing how customers pay

If HMRC begin to record beyond the above, they will begin undertaking what is known as “Directed Surveillance”, which is covered by RIPA and requires specific authorisation to allow HMRC to conduct this, as it violates Article 8 of the HRA. Often HMRC can exceed their powers without realising it by recording the gender, name or appearance of staff or customers, and should be held to scrutiny when a review of any Test Purchase is made.

Additional Information

Although they may not offer, HMRC are obliged to share the contemporaneous notes made by the Officers if requested. From our experience, there can be inconsistencies between the contemporaneous notes and the more formal looking “summaries” they offer. For example we have noted in a recent case:

• Typographical errors showing that less customers were in the restaurant than was originally recorded
• Typographical errors showing that less covers were in the restaurant than was originally recorded

Not only does this cast doubt on the credibility of the Test Purchase and the Officer, it has the same effect on the Model HMRC have produced off the back of it.

Conclusion

It is imperative that business owners record their takings accurately at all times. HMRC do not need to serve a Notice to undertake a Test Purchase exercise, and generally the first time a business owner is made aware on has happened is when a brown envelope drops through their door advising of a compliance check, or when HMRC turn up to their premises unannounced. And that is just the start of it.

As a firm where each advisor has spent time at HMRC, some even undertaking Test Purchases themselves, we are uniquely placed to assist if you or a client have been the subject of Covert, or Directed Surveillance. If you would like further information, please contact us via the information below.