Enquiry - gross profit margin

Enquiry - gross profit margin

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I act or a fish and chip shop. The records are poor and for the year under enquiry the GP% was 53%.In the two previous years, the GP% was 53% and 55% and in the subsequent year 61%.

During the enquiry year there was a capital introduced of £20k which the client has not been able to substantiate. The inspector want to treat this as unrecorded sales thus increasing the GP% to 63%.

But the real problem lies in the earlier years as he intends to uplift the sales so that the GP% for the earlier years is also equates to 63%. This would result in substantial additional tax payable (plus of course interest and penalties).

But there was no capital introduced or cash account difference in the earlier years - in which case is the inspector entitled to do this under the discovery rules?

Rob

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By User deleted
23rd Nov 2006 14:38

Guess your client's hanging himself out to dry.
True, there have been big variations in the price of potatoes over recent years, and some years the prices have gone so high that it has proved impossible to maintain margins through higher prices and/or smaller portions; so there has been no consistency in GP margins even where the records are sound.

I'm looking at a rural chippie with GPs of 67% for 2002, 63% for 2003, 66% for 2004, and 68% for 2005 - which whilst it helps prove my contention, probably doesn't bring you much joy!

The crunch has to be how someone can introduce £20K and not know exactly where it's come from.

To make things worse, in our neck of the woods, over the last year or two there has been a proved link up (with prosecutions) between chip shops with unused accomodation over, and illegal immigrants; and I have heard (I hope wild) rumours that there are suppliers around who routinely only invoice for half the goods delivered, balance paid in cash, to facilitate supression of sales.

None of which can make for cheerful reading if the records are "poor", leaving aside the question as to whether your "poor" might be construed by HMRC as "negligently inadequate".

I'd say it's up to your client. If he can't or won't provide evidence as to the provenance of that £20,000; then all you can do is show him what it's going to cost, applying a 63% GP margin from the day he started in trade, and see if that stimulates his memory.

As to "can he do it", then I guess it all depends on just how poor the records are, whether it can be argued that their inadequacy can constitute negligent conduct by the tax payer; and whether the cash introduced was introduced in the form of cash or cheques.

I'm not aware of any protection you might claim which isn't intimately linked to the facts of the case, or which doesn't depend on an appeal to the Commisioners, or both.


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By AnonymousUser
23rd Nov 2006 15:09

A little aside
Not directly relevant but one of our clients who ran a fish & chip shop had an enquiry a number of years ago. The inspector asked how many bags of chips were produced from a sack of potatoes. The client was a bit bemused but eventually guessed at a figure. The inspector glanced at a piece of paper and agreed that this was about right. I questioned the inspector about the source of his information and he admitted that someone from the tax office had been in the shop and purchased a portion of chips, which had then been weighed and they had worked out how many portions came out of a sack.

One of the questions which arose at the time was the one of GP%. Our client pointed out that they had been new to the trade and had made some mistakes which had resulted in stock being wasted and, luckily, they had been in contact with the Fish Friers Federation for help and could produce copies of letters.

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By billgilcom
20th May 2010 10:23

Fish and Chips

Clearly the answer lies in whether you can beat what HMRC will call the doctrine of continuity (basically once a tax evader always a tax evader) and the business economics (BEN)  approach. Clearly a guesstimate of gross profit and a recalcualting of profits is only one man's conjecture if it is not backed up by something concrete (e.g. money appearing out of thin air). However in your clients case the other "concrete" evidence of unexplained wealth is apparent and it looks like a negotiation job looking for the reasons that performance shouldn't be tied to the HMRC gospel statistics of average national wages and retail prices index. Firstly you need to address the £20K source (however embarassing it might be for your client and/or even the accountant ) to see if it can be explained and evidenced and then look at the BEN and any differences in earlier years that would overcome a direct extrapolation to earlier years of either the results or means problems.

 

Hope that this helps

[email protected]

www.wamstaxltd.com

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