TaxationWeb's Mark McLaughlin is concerned that HMRC's increased use of benchmarking will automatically lead to enquiries for less successful businesses.
I received an interesting email this week from Abbey Tax Protection. It pointed out that HM Revenue & Customs (HMRC) has a 'transparent benchmarking team', which has selected a number of trade sectors to test the use of 'benchmarks'.
These benchmarks are used to compare the 'net profit rate' of a business with competitors in its particular trade sector, to see whether their profit rate falls within a certain expected range.
For example, one of the trades selected by HMRC for benchmarking is painters and decorators. HMRC has used information from the tax returns of painters and decorators for the past three years, to determine a 'net profit benchmark range'. Apparently, the net profit benchmark range for painters and decorators is 59%-79%.
HMRC is understood to be writing to the selected trade sectors, including painters and decorators, inviting them to work out their net profit rate. HMRC's letters apparently suggest that if the net profit for the business "doesn't look right", it could be a sign that some of the figures on the business owner's tax return are not correct.
The purpose of HMRC's letters appears to be to encourage businesses whose net profit ratio falls outside the benchmarking range to check that their accounts and tax return are correct. And the use of statistics by HMRC is nothing new - its 'business economic notes' for specific business sectors were published and in the public domain for a number of years.
However, as Abbey Tax Protection pointed out: "The key question really is, what will HMRC do if a business files a tax return which is outside the benchmark range? Is a full blown investigation the inevitable outcome?"
It is not difficult to envisage the arbitrary use of benchmarks causing problems if used inappropriately, particularly in respect of cash-based businesses falling outside HMRC's benchmark ranges. If the net profit for such businesses "doesn't look right" because it is too low, will HMRC seek to increase business profits to within the benchmark range on that basis alone?
I certainly hope not - we have already seen too many cases where HMRC presumes too much, as in the Newells' case which is in more detail here.
Best wishes
Mark McLaughlin
Managing Editor
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