HMRC Use of Profit Ratio Benchmarks on Trade Sectors

17 April 2014

The Transparent Benchmarking Team within HM Revenue & Customs (HMRC) has selected a number of trade sectors to test the use of ‘benchmarks’.

The benchmarks provide businesses, within the chosen trade sector, with a guide to see whether the net profit rate they are achieving is comparable to their competitors and within the ‘parameters’ expected by HMRC.

As one of the selected trades, painters and decorators have started to receive letters telling them that HMRC has compared the tax returns submitted by all painters and decorators over the last three years.

The turnover declared and expenses claimed on all of the returns have been used by HMRC to determine a ‘net profit ratio’. The net profit ratio benchmark range for painters and decorators has been calculated at between 59-79%, to reflect the fact that every business, even comparable businesses within the same sector, are run differently and have their own unique characteristics.

The letters go on to state that if the painter or decorators net profit ratio does not fall within the benchmark range, this could be down to two common reasons:

• Numbers – have the right numbers been put in the right boxes?
• Expenses – have any expenses been claimed by mistake or not claimed for?

The key unanswered question is whether a tradesman, whose profits fall below the benchmark range, will then be subjected to a full-blown tax enquiry.