"HMRC Benchmarking": What is it, and what does it mean to businesses?
HMRC has what is called a Transparent Benchmarking Team, assigned to test the profit ratio "benchmarks" among a selection of specific trade sectors. Declared turnover and expenses claimed on all the tax returns in specific sectors will be used by HMRC to determine the net profit ratio, i.e., the "benchmark", of particular industry sectors.
What is Benchmarking?
HMRC has selected a number of trade sectors to test benchmarking by using the benchmark guide to see whether the net profit rate individuals/individual businesses are achieving is comparable to their competitors and within the "parameters" expected by HMRC.
What might that mean to businesses?
Painters and decorators are one of the trades that HMRC has selected to test benchmarks. Many received letters telling them that HMRC has compared their tax return to the benchmark guide’s net profit rate for all painters and decorators over the last three years. The net profit ratio benchmark between businesses in the same sector allows for the fact that every business, even within the same sector, will have varying net profit and expenses ratios, for which the calculated margin is between 59% and 79%.
So, what if you don’t come within the benchmark?
If a painter or decorator’s net profit ratio does not fall within the benchmark range between 59% and 79%, HMRC pinpoint two common reasons why that might be:
- Figures: Did you put the right figures in the right boxes?
- Expenses: Did you claim an expense by mistake, or did not forget to claim an expense?
What if you can’t answer: I put in the wrong figure or I claimed an expense I shouldn’t have?
It is probable that should a painter and decorator file a tax return that is outside the benchmark range (i.e., below 59%) and can’t say why, then HMRC will want to look into why for you, and that could mean an HMRC investigation.
What should I do?
Look at legal ways to reduce your tax bill. Ensure you accounts are up to scrutiny, by declaring all your income and taking note of what is and what is not an allowable expense. The best way to save money in taxes is the legal way, and we can point you to many, many ways to achieve that. Visit our blog or talk to your account manager.