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HMRC internal manual

Enquiry Manual

Recalculating Profits: Business Models: Wastage

It is often a relatively straightforward matter to calculate what the profits might have been on the basis of some form of mark-up exercise. However, the turnover will have been the amount projected only if every item was sold at the normal price. This will rarely, if ever, be the case. The business model will produce a theoretical maximum before allowance for wastage.

Wastage will reduce the gross profit and gross profit rate from this theoretical maximum. For instance, assume a simple comparison of cost and sale prices has shown a GPR of 20 per cent (that is, a mark-up rate of 25 per cent).

It is agreed that there is wastage of 5 per cent of goods purchased.

Therefore if £200 worth are bought, £10 worth will be lost.

Theoretical sales are £190 x 125% = £237.50

Gross profit is therefore £237.50 - £200 = £37.50

Gross Profit Rate becomes £37.50 ÷ £237.50 x 100% = 15.8%

The mark-up rate is 15.8 ÷ (100 - 15.8) x 100% = 18.76%

There will be some wastage in any business but the proprietor will try to keep this to a minimum. This should reduce with experience. You should discuss possible wastage with the proprietor - preferably in precise terms such as the number of occasions, the number of items involved and so on. Consider what the proprietor tells you. Does it seem reasonable from what you know of this business, similar business and the trade in general?

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000)
  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000)

(This content has been withheld because of exemptions in the Freedom of Information Act 2000) (This content has been withheld because of exemptions in the Freedom of Information Act 2000)