Contractors may start to receive HMRC Benchmarking letters from the organisation’s Transparent Benchmarking Team. The taxman says the letters provide profit benchmarks for different sectors, professions and trades and are designed to help small businesses, such as limited company contractors, to complete their tax return more accurately.
However, ContractorCalculator CEO Dave Chaplin believes that the letters are really another HMRC strategy to extract more tax yield from businesses. He suggests that, apart from checking recent tax paperwork for errors, contractors should take no action: “The taxman is desperate for cash and these letters are a low-expense fishing expedition to see if people can be conned into paying more tax than they should.”
According to Guy Smith of Abbey Tax, the letters being sent from HMRC’s Transparent Benchmarking Team say: “We are testing the use of benchmarks because we think it could help business owners to make sure that their Self Assessment returns are correct.”
Smith says that the letter goes on to say:“Research in other countries has shown that telling businesses in the same trade how similar businesses are performing can help them get their tax return right. We want to see if this works in the UK.”
What the Transparent Benchmarking Team has done is monitor specific sectors over time and, using tax return data, has calculated average profit margins for different types of business. Painters and decorators, for example, have profits averaging between 59% and 79%. Driving instructors’ profits average between 31% and 67%.
Chaplin’s advice to any contractors who receive such letters is to check all their tax paperwork first to ensure they have made no obvious mistakes: “Contractors are smart, they have smart accountants and have probably made no mistakes. There is no compulsion to respond to the letters, but it is worth checking all the same.
“HMRC is using quite crude metrics to cast the net wide. However, there is a slim chance that a contractor’s profits on their tax return will prompt an investigation.
“But,” Chaplin concludes, “most contractors should already have tax investigation insurance in place; if they don’t then they should seriously consider investing in a policy, which can cost as little as a round of drinks each month.”