HMRC has started using profit ratio ‘benchmarks’ on trade sectors. The benchmarks provide businesses, within a chosen trade sector, with a guide to see whether the net profit rate they are achieving is comparable with their competitors and within the ‘parameters’ expected by HMRC.
Some painters and decorators have started to receive letters telling them that HMRC has compared the tax returns submitted by all painters and decorators over the last three years. The turnover declared and expenses claimed on all of these returns have been used by HMRC to determine a ‘net profit ratio’.
The net profit ratio benchmark range for painters and decorators has been calculated at between 59-79%, a variance to reflect the fact that every business, even comparable businesses within the same sector, are run differently and do have their own unique characteristics. These letters go on to state that if the painter or decorators’ net profit ratio does not fall within the benchmark range, this could be down to two common reasons:
1. Numbers – have the right numbers been put in the right boxes?
2. Expenses – have any expenses been claimed by mistake or not claimed for?
However, surely the key question really is, what will HMRC do if a painter or decorator files a tax return which is outside the benchmark range, in other words achieving less than 59%? It just may be the start of an enquiry.
The trade sectors are just the start, surely all businesses can soon expect to be benchmarked against HMRC’s statistics - so be ready.
By David White a Partner in Charterhouse, based in Beaconsfield
David White is an equity partner in Charterhouse a practising firm of Chartered Accountants based in Beaconsfield and Harrow. David is Charterhouse through and through having been with them for 30 years...