With income tax and National Insurance contributions (NIC) making up 44 per cent of UK tax receipts, it is hardly surprising that HMRC has increased its focus of employers’ records to check the correct reporting of expenses, benefits and payroll deductions. It targets use of its resource, using questionnaires to identify those employers at risk of having made mistakes. This increased and focused compliance activity, combined with fast changes to the legislation, can often lead to HMRC challenge and the potential for costly settlements.
A challenging environment
Despite the complexities in the UK tax system, employers are expected to pay all employee earnings through payroll and account for the correct income tax and NIC. In addition, they are required to accurately report to HMRC all benefits provided to their employees and office holders.
Simply identifying who should be on the payroll can be a challenge, with the employment status of consultants and contractors frequently questioned, and there is considerable confusion around the engagement of office holders, such as non-executive directors, who should always be on the payroll.
Employers often struggle with the correct reporting of benefits, but the complexity of completing forms P11D has increased massively for the 2017/18 tax year, due to the new optional remuneration arrangement (OpRA) rules. We are expecting compliance with these new rules to be an important part of HMRC’s employer record checks in the future.
Settlements can be costly, with employers not only settling the outstanding tax and NIC liability, but also paying interest and sizeable penalties in some cases.
Common areas of non-compliance
The following areas are vulnerable to HMRC challenge.
- Employment status – this is a grey area and has become a high priority on HMRC’s agenda.
- Termination payments – there can be misunderstandings around the use of the £30,000 exemption.
- Staff entertaining – the exemptions are often incorrectly applied and working lunches not taxed appropriately.
- Employee’s personal bills, such as mobile phones and internet access – tax relief is only due where there is an identifiable additional cost for business use.
- Travel costs – with an increase in the practice of home-working, more claims are being made for home to workplace travel. HMRC is increasingly challenging such claims, arguing that the employer’s office etc is a permanent workplace, making the associated travel costs personal ordinary commuting.
- Internationally mobile employees – movement of employees across borders brings strict compliance obligations for employers in terms of income tax and social security. Visitors to the UK for just a few days bring such obligations, although these can be relaxed through a short-term business visitors agreement with HMRC. Even with such agreement in place, there are still tracking and reporting obligations. Share based reward to internationally mobile employees brings additional complications following changes to the taxation rules in 2015, so this is likely to be an area of focus by HMRC.
- Employee shares – Giving shares to employees can give rise to unexpected liabilities and substantial penalties for failure to complete appropriate forms at the right time.
What should employers do?
It is recommended that employers undertake regular reviews of their workers to ensure that all those engaged as an employee or office holder are on the payroll and all earnings are being correctly reported.
Furthermore, a review of expense claim processes should be undertaken to ensure that robust processes are in place, and regular reviews of claims should be performed to avoid a challenge from HMRC as to the business nature of reimbursed expenses.
Employers should undertake a careful review of all benefits provided to ensure that they are correctly applying exemptions for staff welfare costs and reporting those that are taxable, and to ensure accurate reporting of all other benefits, particularly in view of the new OpRA rules.