HMRC BENCHMARKS TRADERS PROFITS 2014 Tlley Guidance July 2014 Disclaimer Tlley Guidance takes every care when preparing this material. Hwever, n respnsibility can be accepted fr any lsses arising t any persn acting r refraining frm acting as a result f the material cntained in these ntes. All rights reserved. N part f these ntes may be reprduced r transmitted, in any frm r by any means, electrnic, mechanical, phtcpying, recrding r therwise, withut the prir written permissin f Tlley. Sme f the links within this dcument are subscriptin sensitive. If yu d nt have a subscriptin t Tlley Guidance then yu can request a free trial http://www.tlley.c.uk/cntent
Tlley Guidance July 2014 HMRC trials benchmarking initiative Prduced by Tlley in partnership with Guy Smith f Abbey Tax 04/07/2014 HMRC has begun testing the value f publishing 'benchmarks', in an effrt t imprve vluntary cmpliance and behaviur in varius trade sectrs. By drawing attentin t the benchmarks, HMRC hpes t reduce the scpe fr errrs being made by the businesses falling within the targeted trade sectrs, bth befre and after their Tax Returns have been filed. S far this year HMRC has written t painters and decratrs, as well as driving instructrs, t tell them what their benchmarking range is and the cmmn risk areas identified where the mst mistakes are made. What is a benchmark? In simple terms, a benchmark is a 'bttm line' net prfit rati. In rder t calculate the net prfit rati, HMRC deducts the ttal expenses claimed frm the turnver declared t arrive at the net prfit. The net prfit is then divided by the turnver figure and multiplied by 100 t arrive at the net prfit rati. Fr example, HMRC has used infrmatin frm the Tax Returns f all painters and decratrs fr the last three years t arrive at a benchmark range f between 59-79%. A similar exercise was undertaken n the Tax Returns submitted by driving instructrs t arrive at a range between 31-67%. What d the letters say? Titled 'Helping yu cmplete yur 2013/14 Tax Return', the letters issued by the Transparent Benchmarking Team within HMRC state: "We are testing the use f benchmarks because we think it culd help business wners t make sure that their Self Assessment Returns are crrect... Research in ther cuntries has shwn that telling businesses in the same trade hw similar businesses are perfrming, can help them get their return right. We want t see if this wrks in the UK." The letters include examples t highlight why sme businesses may fall belw r abve the benchmark range. What are the cmmn risk areas? Aside frm advising the businesses invlved t check that all cash payments and ther ancillary incme has been declared in the turnver figure, the letters refer t items f expenditure which are mst cmmnly cmputed incrrectly: 2
Tlley Guidance July 2014 travel expenses telephne csts utility and insurance charges prfessinal fees capital expenditure Advice is prvided by HMRC in the letters t explain what can and cannt be claimed. Click here t read an annymised cpy f a typical letter. Click here t view pdf What is likely t happen next? If a business within the targeted trade sectr files a 2013/14 Tax Return shwing a rati utside the benchmark range, HMRC has a generic letter ready t issue. The letter titled 'Benchmarking - Are yu happy with yur perfrmance?' refers t the first letter intrducing the benchmarking initiative and states "Yur Return shws yu are utside the 'nrm' fr perfrmance in yur industry". HMRC Research Reprt 307, Appendix C The business wner is then invited t telephne HMRC and explain what amendments are required t his Tax Return r cnfirm that the Return is crrect. Hw des benchmarking fit int wider HMRC cmpliance activity? HMRC has adpted a prmte, prevent, respnd apprach t cmpliance wrk. See the speech by Jennie Granger, the Directr General (Enfrcement and Cmpliance) fr HMRC, n 18 July 2013. By prmting a new initiative such as benchmarking, HMRC is being pen abut the net prfit rati it expects t see and the ptential risk areas which have been identified. The purpse f the first letter titled 'Helping yu cmplete yur 2013/14 Tax Return' is the prmtin element t benchmarking. The preventin aspect f the apprach is where HMRC flags up the risk f nn-cmpliance clse t r shrtly after the Tax Return has been filed r the statutry filing date. The letter titled 'Benchmarking - Are yu happy with yur perfrmance?' is an example f HMRC trying t prevent an errr after a Tax Return has been filed, by encuraging a vluntary amendment. After attempting t be transparent in prmting benchmarking and trying t prevent any errrs, HMRC is likely t respnd by launching a cmpliance check int any Tax Returns which have been filed belw the benchmarking range. The cmpliance check culd be in the frm f a business recrds check r even a full enquiry. See the HMRC relaunches business recrds checks news item and the HMRC pwers t pen an enquiry int a return guidance nte. 3
Tlley Guidance July 2014 Are nly businesses being targeted? It is nt nly businesses which are being targeted. HMRC has als been benchmarking Tax Returns filed by individuals, which has prven t be very cntrversial. A thusand letters titled 'Yur effective rate f tax' have been issued with the recipients tld "we can see that yur effective rate f tax is lwer than the average fr peple with a similar amunt f incme t yu. This culd mean that there is smething wrng with yur Self Assessment Tax Return." Further int the letter, the individual is asked t: "Please check that the entries n yur Self Assessment Tax Return are crrect and that yu have: declared all yur incme and gains claimed the right amunt f expenses, deductins and tax reliefs" Many peple wh received these letters immediately pinted ut that they had made a large ne-ff gift aid dnatin during the year, a pensin payment r even carried frward a lss. Several tax advisers were quted in the media calling the letters 'bullying' in tne and issued in a 'scattergun' fashin, withut a thrugh check f the individuals' persnal circumstances. Click here t read an annymised cpy f a typical letter. Click here t view pdf What are the wider issues? HMRC knws frm market research it cmmissined last year and published in March 2014 that businesses whse net prfit rati is utside the prescribed benchmarking range will lk fr ways t get back int the range. Business wners wh were interviewed during the research said if they were utside the tp end f the range, they wuld assume they were paying t much tax and wuld lk t increase their csts r ask their accuntant what ther businesses were ding which they culd replicate t bring their prfit rati dwn. HMRC Research Reprt 307, Chapters 7.4, 7.7 Sme f the ther business wners interviewed said tax evaders wuld manipulate their figures t fall within the accepted limits t escape detectin, if their rati fell utside the lwer benchmark range. HMRC Research Reprt 307, Chapter 7.7 Overall, the business wners assumed transparent benchmarking was abut deterring evasin and a threat f an impending investigatin. Mst wrrying f all, benchmarking is a threat t the lng standing principle f peple and businesses paying the right amunt f tax at the right time, with business wners cnsidering manipulating their net prfit ratis t fall within their benchmarking range, in rder t avid any further interventin frm HMRC. 4
Tlley Guidance July 2014 What are the pints tax advisers need t cnsider? Tax advisers need t cnsider a number f pints: HMRC has written directly t the business wners within the targeted trade sectrs and nt autmatically sent cpies t the authrised tax agent. Indeed, the benchmarking letters state "If yu have a tax agent (eg accuntant) please let them have a cpy f this letter as sn as pssible". As a result, tax advisers may wish t circulate a news alert amngst their clients warning f this nging activity and ask t be kept infrmed if any such letters arrive When preparing the accunts and cmpleting the 2013/14 Tax Returns n behalf f clients, it wuld be sensible t discuss the cmmn risk areas and t make a nte in the white space f the Return f any pertinent factrs affecting any expenditure claims and / r any fluctuatins in trade The tax adviser wuld be wise t highlight HMRC's attitude twards behaviur if errrs are fund during a cmpliance check. If a business wner has received a benchmarking letter and then an errr is fund during an enquiry, HMRC will n dubt argue that the errr was made deliberately because the letter was nt acted upn. See the Penalty rates and structure fr inaccuracies in returns and Calculating the penalty fr inaccuracies in returns -- behaviur f the taxpayer guidance ntes The apprach with benchmarking letters issued t individuals is slightly different. Firstly, HMRC has been sending cpies t the authrised agent. Secndly, the adviser can affrd t be mre aggressive with HMRC cncerning these letters as they refer t a clsed year. The letters are quting figures submitted in respect f the 2011/12 tax year, with the enquiry windw already clsed fr that year, as well as the pprtunity t self amend. Unless HMRC has made a discvery r a late Return has been filed, the year cannt be pened and the individual and tax adviser can ignre the letter if they knw the figures declared are accurate The benchmarking initiative is an pprtunity fr tax advisers t remind their clients f the imprtance f gd recrd keeping, particularly surrunding mtr and travel expenditure pst-samadian. See the Upper Tribunal rejects Samadian appeal news item 5