Employment taxes

HMRC is increasingly focused on employment tax risk and targeting its activity in industries, sectors and particular types of businesses. A more sophisticated, data-driven generation of investigation officers has evolved leading to increased employment tax yields for HMRC. 

Informed by data and using tools such as nudge or ‘one to many’ letters, ‘know your customer’ reviews, aspect enquiries or a general employer compliance review, HMRC’s employment tax compliance yield was £34bn in 2022/23.

Enquiries can cover:

• pay as you earn (PAYE) compliance; 
• National Minimum Wage;
• off-payroll working;
• Construction Industry Scheme;
• hybrid working arrangements;
• Business Risk Review +; and 
• serious fraud investigations.

What are the risks of ignoring HMRC nudge letters for employment tax risks?

HMRC knows the key employment tax risks of your business, potentially even before you do. As a result, when a letter from HMRC arrives claiming you have a potential issue, it’s more than likely that the issue is real. 

Add in the urgency of a reply-by deadline, followed up with a know your customer review and what seemed like a straightforward request becomes a stressful, costly, and protracted enquiry. 

How we can help with the HMRC enquiry process

We can guide you through the HMRC enquiry process, helping you to resolve the issue as quickly and as cost-effective as possible.

Our experts can help risk-assess your policies and processes so you can make any necessary enhancements or improvements. This can be particularly helpful for those within the Senior Accounting Officer regime.

But we know from personal experience that it can often be easier and faster to talk things through, so please get in touch to discuss how we can work together.

For support on employment taxes strategy and compliance, contact Andrew Timpson. 

The Senior Accounting Officer (SAO) regime applies to most areas of tax, with employment tax compliance presenting particular challenges. SAO is an area of focus for HMRC. 

The SAO rules apply to large companies with a turnover of more than £200m and/or which have a balance sheet total of greater than £2bn. The nominated SAO is required to take reasonable steps to ensure that appropriate tax accounting regimes are in place. Failure to do so can result in fines for the company and the SAO personally as well as reputational damage for the business.

What’s the risk for not applying SAO rules? 

Cross-function responsibility: responsibility for employment tax compliance may be split across different teams such as HR, tax, finance, payroll and reward meaning a lack of clarity as to who has overall ownership for compliance. 

Incompatible technologies: different teams involved in employment tax compliance may use different technology solutions which may not interface with one another leading to manual ‘fixes’.

This presents challenges from an SAO perspective when demonstrating that the business has appropriate tax accounting arrangements that enable the company’s employment tax liabilities to be calculated accurately in all material respects.

How we can help you complying with SAO rules

Our specialist employment tax risk and governance team provide support on all aspects of SAO compliance from initial diagnostic discussions through to assistance with the implementation of appropriate employment tax end-to-end processes and procedures. We also help businesses to meet SAO obligations around training, use of technology and ongoing review.

Our team can provide support either as part of a project with the RSM cross-tax risk and governance team or as part of a standalone employment tax focused project.

For support on employment taxes strategy and compliance, contact Andrew Timpson.

The broad purpose of the off-payroll working rules is to ensure off-payroll workers who work like employees are subject to PAYE and National Insurance Contributions (NIC) in a similar way to employees. Off-payroll workers can include:

• self-employed individuals;
• individuals operating via their own intermediaries (normally a limited company where the ‘IR35’ rules could apply); and
• individuals engaged via other third parties (eg an agency or umbrella company).

What are the risks of non-compliance with the off-payroll working rules?

Non-compliance with the off-payroll working rules brings the following risks. 

• Underpayment of UK PAYE and NIC liabilities, plus HMRC penalties and interest, going back multiple tax years.
• The cost of dealing with an HMRC enquiry.
• Exposure under the Corporate Criminal Offence rules.
• Where overseas off-payroll workers are engaged, wage withholding, social security and other tax risks.
• Employment legal risks associated with re-classification to employee or worker status.

The financial and reputational risks can be substantial.

How we can help you staying up to date with off-payroll working rules

The off-payroll working rules are complex and constantly evolving due to case law, changing legislation and HMRC guidance. 

We can help you stay up to date and compliant. For example, we can:

• risk review your policies and procedures to identify whether these facilitate compliance;
• provide training so that your teams are aware of the risks, know potential traps, and can improve controls;
• help you devise a strategy for optimising workforce compliance; and
• help you assess the status of off-payroll workers.

For support on employment taxes strategy and compliance, contact Andrew Timpson.

Payrolling of benefits is a progressive way of ensuring your employees are taxed on their benefits in kind in real-time through the payroll. 

Payrolling of benefits becomes mandatory form April 2026. 

Payrolling of benefits is a more efficient reporting mechanism, allowing for a reduced and less complex annual reporting process, which in turn leads to reduced compliance cost.

What are the risks of not implementing the payrolling of benefit process?

Implementing the payrolling of benefit process should be low-risk, as long as the formal application process is implemented correctly and before the end of the tax year. Notwithstanding the low risk, we’d always suggest the following actions.

Apply early: ensure the formal application process is implemented in time for HMRC to update employee tax code for the April pay period – whilst HMRC’s updating of employee tax codes should be automatic, new tax code notices will need to be issued for payroll to adopt these into the payroll operation. 

Regular reconciliation: regular reconciliation ensures fluctuations in employee benefit in kind values are captured for payroll purposes and adjustments can be made in real-time. 

How we can help

Getting started: we can support you in the formal application process and payroll set-up, so the tax and National Insurance Contribution (NIC) mechanism is accurately implemented. 

Employee communications: ensuring your workforce understands the changes, the benefits and how it will impact them. 

We can also help in any reconciliation process so all employee benefit in kind values are calculated accurately on a timely basis to ensure employees’ tax position remains consistent throughout the year. 

Finally, we can provide the much-reduced end of year compliance services to complete your company’s obligations.

For support on employment taxes strategy and compliance, contact Andrew Timpson. 

Paying employees at least National Minimum Wage (NMW) for the hours that they work may seem straightforward. However, navigating the NMW Regulations can be complex, and the technicalities and intricacies of this legislation can give rise to an unintended or unexpected breaches.

What are the risks of not paying at least National Minimum Wage (NMW) to your employees?

Where NMW non-compliance is identified as part of an HMRC compliance review, a penalty of up to 200% can be issued on the value of any underpayments identified. 

This can only be mitigated to 100% where all underpayments are attempted to be re-paid to impacted workers (including those who have left the organisation) and the penalty is paid within 14 days. 

Where HMRC identifies underpayments in excess of £500 over a six-year period, the employer can be ‘named and shamed’ by The Department for Business and Trade.

Common pitfalls

Worker categorisation: this is an essential first step when considering NMW compliance as it determines the calculation methodology to assess whether NMW is being paid.

Time and attendance: accurately capturing and being able to evidence all working time can be challenging. Time and attendance inaccuracies are a common cause of NMW underpayments.

Deductions from pay: non statutory deductions made from an employee’s pay can reduce pay for the purposes of NMW.

Salary sacrifice: employers operating these schemes should regularly monitor these arrangements to mitigate the risk of NMW breaches.

Dress code: dress codes or uniform policies can give rise to NMW risks where employers impose specific requirements on employees.

Apprentices: not adjusting the apprenticeship NMW rate dependent on their age, role and progression through the apprenticeship programme. 

How we can help

Our specialist employment tax and legal teams support clients through both self-review exercises and HMRC NMW audits. The team has a wide range of experience and has worked alongside clients across all sectors to improve and strengthen their overall processes around NMW compliance.

For support on employment taxes strategy and compliance, contact Andrew Timpson.