Penalties guidance: defining gross profit
For the purposes of the penalty framework, gross profit is defined as the VAT exclusive turnover of the business, in the preceding 12 month accounting period, less the VAT exclusive cost of goods sold and other direct costs. These figures should have been adjusted to take account of opening and closing stock valuations, where appropriate, and should be calculated in accordance with normal accounting practices. In order to verify the gross profit figure, the business will need to provide the Compliance Officer with a copy of its Trading Account, either from the last set of full Accounts, and/or any Accounts which are being prepared.
If a business has not traded for a full 12 months, or the previous accounting period is longer or shorter than 12 months, the figure should be apportioned for a 12 month period.
There may be some circumstances where changes in the business means that the gross profit in the previous years Accounts are not a true reflection of the projected gross profit in the current accounting period. This will be where the size and structure of the business has changed significantly since the last Accounts were drawn up. Where evidence of such changes is provided, the gross profit figure should be adjusted on a ‘fair and reasonable’ basis to account for these changes. The most likely scenario will be where a set of premises have been closed. These changes should have been notified to Registration by the business within 30 days of the change and should therefore be easy to verify.
Other changes in the projected turnover must be supported by evidence of the likely effect, for example, by providing the Officer with a trial balance. The gross profit figure should only be adjusted for penalty purposes when they will have a significant impact on the level of the penalty. Minor changes, and changes which are a result of market conditions, affecting all businesses in the sector, should not be treated as being material for penalty purposes.