HMRC Benchmarking: What do contractors need to know?

Friday 18 July 2014

Although HM Revenue and Customs (HMRC) has been trailing it in certain sectors since April this year, the tax office is now beginning to roll out the tactic on individuals such as contractors as well.

Speaking to Contractor UK, Guy Smith, tax investigations manager at Abbey Tax Protection, has warned independent workers to be wary if they receive such a letter from HMRC.

The idea behind this tactic is to increase the amount of voluntary compliance from businesses within certain sectors by analysing the net profit ratios of firms that take part.

Until now, benchmarking hasn’t really been an issue for the freelance community, but as the tax office start to roll out this strategy on a wider level, limited company contractors could also be affected.

Benchmarking offers businesses a chance to compare their profits against others in the sector, but it also gives the HMRC a chance to compare a contractor’s profits to their income expectations.

The way this is worked out is that the tax office deducts the total amount of expenses that a contractor has claimed away from the gross sum of turn over. Then, with the net profit calculated, HMRC can calculate the net profit ratio by dividing the net profit by the gorss profit and multiplying by 100.

“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. If anything is wrong with your Self Assessment return, it may mean that you have to spend valuable time putting things right – instead of being able to get on with running your business,” according to HMRC.

As most contractors will be familiar with filling out the self assessment tax form, the letters and the benchmarking process also apply to them. 

However, the problem with this approach, according to Mr Smith, is that if a contractor receives a benchmarking letter and it uncovers certain discrepancies in that individuals profits profits, a full inquiry from HMRC could follow.

According to Mr Smith, contractors have not been specifically singled out as targets for the HMRC, nor has any information about which sectors are to be targeted been released yet.

He does go on to say that independent workers must remain ‘vigilant’ if they are contacted about the issue.

Contractors who receive such a letter in the post should consult their financial advisors or accountants for guidance on how to proceed.

Most people will be well within the parameters that HMRC expects, however, any discrepancies that cannot be explained by an individual could lead to further action from the tax office.

So far the letters have been sent to those who work within the painting and decorating profession, but it is unclear which sector will be next.

By Victoria McDonnell

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