18 March 2015
HMRC sends out more fishing letters
Further to previous alerts we have sent out to our clients
regarding HMRC targeting specific trade sectors, we now have wind of a
twist on these being employed by them.  HMRC have been busy tweaking their
benchmarking software to be able to compare net profit ratios. On the back of
this they have already been sending out letters which although aren’t
aggressive in tone make it clear the relevant business should look more closely
at their accounts for mistakes.
Currently they are targeting painters & decorators and
as usual taxi drivers. Unusually they have now included pharmacists also.
 
In addition to the benchmarking which HMRC started a while
ago they have introduced the same benchmarking process on VAT returns. However
with vat returns they are looking at the mark ups. So they look at your
purchases against sales using the figures you have filed on your vat returns
and compares these against the percentages they have collected across the trade
sector. At the moment they are mainly looking at Car mechanics, garages and
anyone retailing furniture as this is where they have collected the most data.
 
If you receive one of these letters don’t panic, just
contact ourselves as soon as you can so we can look into this and identify the
reason – sometimes it’s as simple as a one off purchase or expense which unbalances
your figures and this is what they pick up on.

HMRC’s new fishing letters

HMRC
has a new way to identify businesses it thinks are under declaring profit. It’s
sending letters to those concerned. What should you do if you receive one?

HMRC
studies.
Back in the
1980s HMRC drew up reports on various business sectors which identified profit
ratios, mark-ups, etc. Called Business Economic Notes (BENs), these gave tax
inspectors insight into the businesses they were investigating. HMRC has been
at it again, but this time it’s making use of new technology.

IT checks. HMRC is using special computer
software to compare net business profit ratios. The process is called
benchmarking and it allows HMRC to target those who are apparently declaring
less profit than they should. It has already issued warning letters, albeit
friendly ones, to some suggesting they should review their accounts for
mistakes.

HMRC targets. So far the warning letters have
only been aimed at a few types of business: painters and decorators, taxi
drivers and pharmacists. However, it’s likely the range of target sectors will
be widened significantly in 2015, plus there’s a new development.

VAT returns. HMRC is now using benchmarking
on VAT returns. Rather than net profit ratio it’s comparing mark-ups.
Currently, only car mechanics and furniture retailers are in the spotlight, but
again we expect its search to widen. We’ll keep you posted.

Tip 1. If you’re concerned about
receiving a letter, you can check your accounts and VAT returns against HMRC’s
benchmark profit ratios and mark-ups (see The next step ).

Tip 2. If you receive a letter, don’t
panic; it doesn’t mean HMRC will soon be banging on your door. Nevertheless, we
recommend you consider why your profits or mark-up might be outside HMRC’s
expectations. If you can identify a specific reason, e.g. a one-off expense or
a large bad debt, then write to HMRC and explain. It could save an
investigation.

HMRC’s
so-called benchmarking letters say what profit ratio it expects to see. If you
can identify a reason why your business didn’t achieve this, write to HMRC
immediately. It could avert an investigation
 
 
HMRC’S
BENCHMARKING RATES
 
As at
March 2015 HMRC has made public the following benchmarking rates:
Net
profit rates based on accounting results:
 
  • Taxi
    drivers                               
    29% – 49%
  • Pharmacists                              
    71% – 89%
  • Painters and decorators
                 
    59% – 79%
 
Mark-up rates based on VAT Returns:
 
  • 27% – 82%