HMRC conduct employer compliance reviews to ensure that all employers and contractors are correctly meeting their Construction Industry Scheme (CIS), National Insurance (NI) and tax requirements in relation to their business’ employees. An employer found to be in breach of the legal obligations in these areas can face serious consequences.
Compliance officers are tasked with a very high hit rate for identifying errors in employment tax matters (payroll, P11D etc.). As such, the compliance officer will undergo a lot of research prior to identifying cases suitable for review – in most cases where the officer flags you as low risk the chance of a visit is significantly reduced.
Areas the compliance officer will be looking at in the office include:
The best way to avoid a visit entirely is to ensure:
- significant issues identified on previous reviews;
- regular patterns of late and incorrect returns showing a casual attitude towards compliance;
- no PAYE Settlement Agreement in place;
- very old or no previous P11D dispensation applications;
- at risk sectors where previous high hit rates have been achieved on a national or regional basis.
Top 10 compliance errors
- returns are filed correctly and on time;
- agreement is sought from HMRC on areas such as scale rates, short-term business visitors etc.;
- a PAYE Settlement Agreement is put in place even if only a small amount of liable benefits are provided.
Previous HMRC reviews have demonstrated that the same issues crop up again and again. Typically, these are not arising in payroll operations, but are in relation to expenses and benefits. The most common issues are highlighted below.
1. No remedial action from prior HMRC review – as well as being easy pickings for HMRC, where the issue has been previously flagged they will likely seek to impose far higher penalty charges.
2. Employment status – where consultants and other workers provide services on a self-employed basis, rather than through another limited company, there is a risk of HMRC determining them as employees. In this instance PAYE and NIC would apply, especially where such workers provided services for more than a month or two at a time.
3. Directors’ fees – linked to employment status but worthy of its own category, there is still regular confusion over the payment of directors’ fees, especially to non-executives. Where paid to them personally, a PAYE/NIC liability will most likely apply, and even if they invoice through limited companies, there can still be issues if not correctly structured.
4. Termination pay – there is still a misunderstanding around the £30,000 exemption and, even where no tax underpayment is found, HMRC are increasingly looking into lump sum payments in more detail.
5. Company car fuel – where no fuel scale charge is declared, the officer only needs to find an issue with a single journey for a fuel charge to apply for the whole year. Regular rounding of expenses, inappropriate mileage rates and claiming for home to office travel are key risk areas.
6. Personal phone, internet charges – with more and more staff working from home there are greater incidences of such claims being made. With tax relief only being due on the additional cost of use for business, private contracts on fixed tariffs will be taxed in full where reimbursed by the employer.
7. Staff entertaining and working lunches – where meals/food are provided at or near an employee’s place of work, the compliance officer will often determine a taxable benefit has arisen mainly on the basis of them not receiving such benefits themselves! While such costs can be allowable in certain scenarios (annual events, canteen concession for example), there are many instances where these are taxable.
8. Out of date P11D dispensations – while the dispensation is now obsolete it will still apply for the period of inspection in many instances. Where scale rates and other bespoke allowances are paid, and these have not been agreed by HMRC, then there is a risk of tax exposure unless the employer can show that no profit element arises.
9. Casual employees – certain industries still regularly use casual employees who often only work for a day or two at a time. We have seen that under RTI, HMRC is taking a much stricter line as to these employees being paid through the payroll.
10. Private use of vans – while it is possible to prohibit the private use of vans and so no benefit in kind arises, there are requirements to show that a prohibition is in place and has been observed. Where this is not evidenced, the compliance officers will take an interest.
Other key risk areas
We have not included in the list above certain more complex areas such as share schemes, Construction Industry Scheme and international assignments. These areas often apply only to certain specific industries/employers and the compliance reviews of such areas are not undergone by the compliance officers but referred to specialist teams.
If you are affected by any of the issues raised in this article, or concerned about your employment tax compliance generally, then please contact a member of our Employers’ Support group.