I don’t want to scare you, but I feel it is my duty as a fellow restaurateur and as an accountant. After reading this headline, many of you will think this blog entry is going to be about the economy and how it will affect your restaurant business. As for the economy, I think the worst is behind us, but there is another threat to your business that is going to be a lot worse in the next few years. Let me explain…
Today’s Toronto Star ran an article about restaurants hiding cash income. You can find it here: Restaurant probe finds $40M in ‘phantom’ sales.
Until recently, most detective work surrounding the use of zappers had been focused in Quebec. Now, we find out that the CRA has been involved in a two year, national probe of the restaurant industry. So far, they’ve found about $40 million of unreported income, though they expect to find much more by next March when the study is completed.
So far, I’ve discussed the POS system and how to maintain it for accurate reporting, how to document your sales mix for all audit periods, and the importance of maintaining an accurate history of your menu prices. Taken together, these bookkeeping tasks are crucial in helping the restaurateur determine, and properly support, accurate weighted average prices. This is a crucial component of the mark-up calculation performed during a typical audit.
Now we’ll take a look at the actual cost of the alcoholic beverages purchased for sale.
As a restaurateur, you probably have a general idea how your menus and prices have changed over the last few years. Unfortunately, only having a “general idea” can land you in a big pot of trouble when your restaurant is audited. This post reviews a few of the methods of documenting key changes to your menu and prices. When the time comes, you will have accurate, credible information to support your actual margins and document the reasons for variances from the expected margins.
This is the second post in the series on auditproofing your restaurant from an unfair audit. Most restaurants and bars with weak internal controls (almost all independent establishments), will be audited by the Canada Revenue Agency (CRA) or a provincial tax authority using an indirect audit approach. In most cases, this approach will be the mark-up method, which seeks to project the sales level that was likely to have been generated based on the amount of alcoholic beverages purchased by the establishment. As we have seen in other posts, this audit method involves making a number of assumptions about the operation. Determining what these assumptions should be, can be quite complicated.
Today’s posting is the first in a series of articles about “auditproofing” your restaurant. By this, I mean taking proactive steps to help ensure that your restaurant or bar is not unfairly reassessed for sales and income taxes when it is audited by the CRA or provincial tax ministry. Please check back regularly for other methods of auditproofing your business. If you have any questions, please post comments to the articles, and I will do my best to respond. If you prefer, you can email your questions to me.
Most restaurants have a computerized point of sale (POS) system to keep track of items ordered by each guest, send orders to the kitchen or bar, and process guest check settlements. Most systems can keep track of many other important transactions, such as discounts given (by type and employee), voids (with reasons, by type and employee), ingredient usage, and many others. From a tax perspective, the POS system keeps track of every item ordered and calculates the appropriate sales tax. Just like your car, the POS needs to be maintained properly.
When the auditor arrives to audit your bar or restaurant, he or she will review your internal controls to ensure the accuracy and completeness of your recorded sales and the taxes thereon. If the documentation is not available to determine that appropriate controls were effective throughout the audit period, the auditor will conclude that the controls were lacking and that the books and records may not be relied upon to support the sales taxes collected by the restaurant. Most independent restaurants will fall into this category. As a result, the auditor will proceed to apply an indirect audit approach to estimating the amount of sales that were likely to have been generated, based on your purchases of alcoholic beverages. Several key assumptions are used in this method, which I will describe in the remainder of this post.
If you have been following the posts on this site (and several others on the internet), you know that your restaurant or bar business faces a serious risk when it is audited by CRA or the provincial auditors. In most cases, your licensed business will be audited, it is just a matter of when.
This post concerns customer comps or promotional drinks served by restaurants and bars. The issue is: how much is too much?
Most restaurants and bars offer promotional drinks to their customers from time to time. Sometimes it is to acknowledge frequent visits, high spending or special occasions. Other times it may be to “compensate” a customer for a service or quality issue. In either case, the customer receives a free (complimentary) drink. All restaurateurs know that this is an effective method of promoting and growing a restaurant business. However, if you don’t keep track of these types of promotions properly, customer comps could be your downfall.
In a National Post article last December, CRA warns business owners on Tax Cheating Software, it disclosed that the CRA has dedicated 5,000 employees to the task of finding unreported income and ensuring that sales taxes are remitted properly, “even when sales records are missing.” This is a thinly disguised warning to restaurants (and other cash businesses) that CRA is about to descend on your business, using indirect audit methods to identify unreported income and the sales taxes that should have been remitted. The reference to tax cheating software refers to sales suppression software, also known as “zappers”.