HMRC’s employer compliance officers undertake many thousands of PAYE inspections in any given year. HMRC’s engagement with organisations depends on their size and complexity and is evolving. HMRC interventions covering PAYE, employee income tax, National Insurance contributions (NIC), pay and benefits can now range from enquires by letters to onsite reviews, with the methods used by HMRC having developed over time. Those most commonly seen at present are business risk reviews (BRR, BRR+ from 1 October 2019 when the BRR process was revised), national minimum wage (NMW) audits, PAYE compliance reviews and nudge letters. Here we discuss PAYE compliance reviews which many small and medium sized employers experience.
PAYE compliance reviews
HMRC has, in recent years, increased its activity by adopting a range of approaches. A compliance review might just cover general PAYE compliance, be an aspect review or part of a BRR+ for larger employers.
However, over the last couple of years HMRC has also taken a desk top approach, issuing a letter containing a list of questions to establish if an onsite visit or further interactions are needed.
When a full review is instigated HMRC will now often request details for the past three years instead of just one. This is an interesting development, as, arguably, it changes the focus of the visit from that of a check to ensure an employer is compliant, to one where HMRC is also seeking to identify areas where errors have been made and recover underpaid taxes.
For basic PAYE compliance checks, HMRC caseworkers will want to speak to the people who deal with payroll, expenses and benefits, and often human resources. In smaller employers this may be one person, but in larger employers it is likely to be at least three different people. In these circumstances it is important that the employer is well prepared, as any seemingly inconsistent or unclear information provided to HMRC in relation to a particular benefit or expense can lead to undue complications.
Key areas for review include:
- employment status;
- termination payments;
- optional remuneration/salary sacrifice;
- travel and subsistence (including confusion over homeworkers and temporary workplaces);
- mileage payments;
- staff entertaining;
- provision of benefits such as loans, cars/vans and fuel;
- expatriate employees;
- payments to directors; and
- round sum or un-receipted payments.
In many of the enquiries we have dealt with on behalf of clients, often the HMRC caseworker dealing with the enquiry does not fully understand all the legislation and how it applies in a business environment. It therefore becomes critical to be able demonstrate how the legislation should apply to a business situation and to try to escalate matters to more senior HMRC officers where necessary.
In order to conclude an enquiry, HMRC will want to ask a number of questions to consider if reasonable care was taken by the business. This can impact the number of years under consideration for any underdeclared tax (four years or six) as well as the penalty position.
What is clear is that we have seen an increase in the number and type of interventions initiated by HMRC, and that this is likely to continue for some time. This highlights the need for good employee tax compliance, backed up by a robust review process. It is equally clear that employers should not take these visits or letters lightly as the financial and reputational consequences are potentially significant. In addition, employers that engage off-payroll workers should look closely at those arrangements, as experience has shown that the tax consequences of incorrect status can be extremely costly, especially given the imminent changes in this area.
For more information and for details of how RSM can support good PAYE compliance please get in touch with Susan Ball.