HMRC has begun testing the value of publishing ‘benchmarks’, in an effort to improve voluntary compliance and behaviour in various trade sectors. By drawing attention to the benchmarks, HMRC hopes to reduce the scope for errors being made by the businesses falling within the targeted trade sectors, both before and after their Tax Returns have been filed.
So far this year HMRC have written to painters and decorators, as well as driving instructors, to tell them what their benchmarking range is and the common risk areas identified where the most mistakes are made.
What is benchmarking?
In simple terms, a benchmark is a ‘bottom line’ net profit ratio.
In order to calculate the net profit ratio, HMRC deducts the total expenses claimed from the turnover declared to arrive at the net profit. The net profit is then divided by the turnover figure and multiplied by 100 to arrive at the net profit ratio.
What do the HMRC letters say?
The letters issued by the Benchmarking Team include examples to highlight why some businesses may fall below or above the benchmark range.
The letters refer to items of expenditure which are most commonly computed incorrectly:
- travel expenses
- telephone costs
- utility and insurance charges
- professional fees
- capital expenditure
If a business within the targeted trade sector files a 2013/14 Tax Return showing a ratio outside the benchmark range the business owner is then invited to telephone HMRC and explain what amendments are required to his Tax Return or confirm that the Return is correct.
Are only businesses being targeted?
It is not only businesses which are being targeted.
HMRC has also been benchmarking Tax Returns filed by individuals. A thousand letters titled ‘Your effective rate of tax’ have been issued with the recipients being told that their effective rate of tax is lower than the average for people with a similar amount of income.
The individual concerned is asked to:
- check that the entries on your Self Assessment Tax Return are correct and that they have
– declared all income and gains
– claimed the right amount of expenses, deductions and tax reliefs.
- If you receive a letter please forward to ourselves if you require assistance as we are not provided with a copy
- When preparing the accounts and completing Tax Returns we should be advised of any pertinent factors affecting any expenditure claims and/or any fluctuations in trade so that an appropriate note can be added to the Return to reduce the risk of Revenue query.
- If a business owner has received a benchmarking letter and then an error is found during a compliance check or enquiry, HMRC may argue that the error was made deliberately because advice given in benchmarking letters was not acted upon.
- The approach with benchmarking letters issued is to individuals is slightly different. Firstly, HMRC has been sending copies to the authorised agent. Secondly, the adviser can afford to be more aggressive with HMRC concerning these letters as they refer to a closed year. The letters are quoting figures submitted in respect of the 2011/12 tax year, with the enquiry window already closed for that year, as well as the opportunity to self amend. Unless HMRC has made a discovery or a late Return has been filed, the year cannot be opened and the individual and tax adviser can ignore the letter if they know the figures declared are accurate.
- The benchmarking initiative highlights the need for clients to maintain good records.
If you have received a benchmarking letter or have any queries or concerns regarding recordkeeping please do give Sue Stephens a call.