Look out for letters from HMRC

People beware!  HMRC are sending benchmarking letters that could catch you out.

The HMRC analysts have come up with a series of net profit ratios and identified the most common mistakes made by small businesses, the idea being that mistakes or errors can be sorted before tax returns are filed.

However, the suggestion is that for those receiving benchmarking letters from HMRC who still make mistakes, a tax enquiry is a real possibility.

Understanding Net Profit Ratios (NPR)

Know your numbers:

• Turnover LESS total expenses = Net profit

• (Net profit DIVIDED BY Turnover) x 100 = Net Profit Ratio (NPR)

For example, HMRC has used information from the tax returns of all painters and decorators for the last three years to arrive at an NPR range of between 59-79%.

A similar exercise was undertaken on the tax returns submitted by driving instructors to arrive at an NPR range of 31-67%.

The ranges are comparatively wide because HMRC accepts there will be variables between businesses, such as geographical location and niche specialisms.

For obvious reasons HMRC aren’t publishing the benchmarks by sector or which industry type they aim to target next, but as long as you trade compliantly and maintain clear accounting records to support your numbers then you have nothing to fear.

Things to watch out for…

Make sure that your expenses have been calculated correctly.

For example, if you are a contractor working in London then the likelihood is that your expenses will mirror many others in your sector, trying to over inflate your expenditure or estimating the amounts spent could raise alarm bells, if it results in you falling outside the benchmark set for your industry sector.

Keep your receipts!  The ownness is on you to prove that the cost was incurred (and that it was a genuine expense).

See the A4C Expenses Guide for more information on what you can claim as a legitimate business expense.

What to do if you receive a HMRC benchmarking letter?

Send it to your accountant immediately! HMRC are not issuing copies to authorised agents so it will be up to you to share this communication with them.

If you don’t have an accountant and would like some free, no obligation advice call Esther or Natasha at A4C today on:

01737 652 852