Brian White, tax partner at Deloitte, answers questions about HMRC’s approach to employment tax compliance and some of the key issues for consideration. He also sets out guidance on the treatment of certain expenses and benefits and hot topics of risk.

I’ve heard that HMRC are moving away from the old style PAYE Audits; what is its current approach?

Historically, HMRC used to knock on the doors of a business every 5 or 6 years and undertake the laborious process of going through reams of employer records. This could often be both a traumatic and time consuming process for businesses and in many cases did not ultimately lead to significant liabilities being uncovered.

The 2006 ‘Review of Links with Large Business’ led to a major change in approach by HMRC to their compliance activity in this area.

Instead of undertaking ad hoc PAYE Audits, the focus has moved to targeting resources at those businesses that are perceived to represent the highest risk. A risk rating is therefore allocated to businesses based on their overall tax compliance; corporation tax, VAT and employment taxes, and this will determine the approach the HMRC takes to the business in respect of employment taxes going forward.

How is a business assigned a risk rating?

This approach was initially adopted by the Large Business Service (LBS) which deals with the UK’s largest businesses. It was then widened to encompass somewhat smaller businesses that fall within HMRC’s Local Compliance (Large & Complex) (LCLC) and now the principles are equally filtering through to smaller businesses.

The first stage of the process is for HMRC to compile a Business Risk Review. The approach taken depends on the level of turnover of the business.

Depending on its size, a business is allocated a Customer Relationship Manager (CRM) or a Single Point of Contact (SPoC). Both CRMs and the SPoCs however have the task of being the point of contact for the business in relation to all HMRC matters. The manner of assigning a risk rating differs depending on whether a CRM or SpoC is assigned.

Even if a business does not currently have a CRM or SpoC allocated, the new approach is filtering down to all smaller businesses.

For CRM cases: HMRC will initially approach the business for an introductory meeting in order to learn more about factors that will influence whether it is low risk. HMRC will use the information gathered at the meeting, along with information they already hold to complete a Business Risk Review Summary Template.

SPoC cases: The SPoC will be responsible for preparing the Business Risk Review together with the specialists in each area of taxation. Their review will however be undertaken without the involvement of the business and will not automatically be communicated to the business. The review would not encompass the same level of detail as the CRM review.

Following the review the business is allocated a risk rating – Low risk or high risk. This determines the approach the HMRC takes to the business going forward.

CRM Review: What does it mean to have a Low Risk Relationship?

Some of the main benefits of obtaining a low risk relationship are as follows:

• Interactions with HMRC are dictated by the business (with the exception of mandatory work, projects etc)
• There will be no HMRC initiated risk assessment activity for at least two to three years
• HMRC are unlikely to question returns or declarations.
• Valid disclosures by the customer will rarely be challenged.
• HMRC will respond to clearance applications and other submissions more quickly, usually without the need to ask for further information.

Where a business is not considered low-risk, it can expect the following relationship with HMRC;

• HMRC will initiate the interventions and take action to address clear errors.
• The Business Risk Review will be prepared annually
• The business will have more in-depth reviews of systems and processes and more thorough investigation of tax issues with teams drawn from across HMRC.
• Clearance applications are likely to be scrutinised in far more detail.

SPoC: Review: What does it mean to have a Low Risk Relationship?

The review will establish whether the business is allocated an ‘indicative high risk’ or ‘indicative low risk’ score. Those businesses deemed low risk are unlikely to receive an intervention from HMRC for the next year or more. Those businesses deemed to be ‘high risk’ will form a pool of cases from which enquiries will be undertaken at random.

What will HMRC look at when determining a risk rating for the business?

A summary of the main areas, called “Assessment Indicators”, considered by HMRC are as follows:

·     Contribution: To what extent are there unexplained tax performance or payment variations, trends or issues?

·     Boundary: What is the level of complexity of international structures, financing and connected party issues?

·     Complexity: What is the potential for risk in the size, scope and depth of business or tax interests?

·     Governance: What is the business’s approach to the management of tax compliance risk, openness and co-operation?

·     Change: What is the degree and pace of change affecting the business and its tax compliance?

·     Tax Strategy: Does the business use tax planning and are the business’s tax judgments likely to match HMRC views?

·     Delivery: What is the business’s ability to deliver the right tax at the right time through processes, systems and skills?

So, what can we do to ensure we achieve a low risk rating?

Where employers demonstrate a good level of compliance by communicating with HMRC and disclosing errors should they arise, future HMRC reviews may be avoided and a low risk rating may be achieved. For example, in SpoC cases, as HMRC undertake their initial review based purely on information they hold, factors such as conduct during enquiries, meeting filing deadlines, and paying tax on time will all influence the risk score.

It is therefore recommended that you proactively manage your tax compliance in order to control the risk exposure.

By undertaking an internal employment taxes review, businesses can often identify any potential compliance exposures from systems currently in place. In addition it may also be able to identify cost saving opportunities within current systems and consider appropriate policies/procedures to reflect and make best use of current HMRC concessions and practice.

What do you mean by an employment taxes review?

Simple steps that a business can take to improve its employer taxes compliance include;

·     Ensuring that its P11D dispensation is up to date; allowable business expenditure not included should strictly be reported on forms P11D

·     Ensuring that its PAYE Settlement Agreement (“PSA”) covers all potential items of expenditure where taxable benefits/ expenses are provided to employees and the business is meeting tax on behalf of the individuals (subject to the rules governing PSAs)

·     Reviewing its expenses policy not only from a tax perspective but also a business cost perspective; it may be that you are paying expenses that you do not wish to!

·     Ensuring that expense claim forms are easy to complete, but also contain sufficient items in order that items can be posted to the correct P&L codes, which are then used for tax reporting purposes

·     Ensuring that petty cash and company card expenditure require the same level detail when claims are made.

·     Ensuring that sign off procedures are adhered too.

An easy way of understanding your exposure to risk is to undertake a sample review of expense claims/ petty cash etc over a 3 month period. You may wish to include the Christmas period as this can often be the occasion when spurious claims occur. A useful approach is to ask yourself the question “If I had to settle this claim with my own money, do I have enough information just to hand it over?”

What are the common mistakes that businesses make?

The main mistake is not updating employment taxes procedures on a regular basis. Often the individual responsible for employment tax at a business has inherited outdate practice and works on the assumption that “it’s the way it’s always been done”. Sometimes either finance/ HR teams think that it is somebody else’s responsibility.

Other mistakes include relying on historic P11D dispensations which do not take into account changes in legislation or HMRC practice, or indeed assuming items are covered or exempt, but in reality they may not be. For example, gifting bottles of wine at Christmas or flowers on the birth of a baby are taxable items and reportable on Forms P11D unless a trivial benefits ruling is given by HMRC or indeed these are included in a business’ PSA.

In addition, employers often misinterpret or miscode items; is an expense subsistence or is it deemed to be staff entertaining? Grey areas can include an internal meal offsite where business is being discussed, typically ‘staff entertaining’ – taxable, versus the same attendees having the same meal at the same venue as part of a training course, typically ‘subsistence’ – non taxable on the employees.

Depending on how expenses/ benefits are supplied or reimbursed can also trigger different reporting requirements. This could give rise to PAYE failures where businesses had incorrectly planned to report the item on Form P11D.  For example, where an individual is reimbursed a non qualifying expense, such as private medical cover, the cash reimbursement would be subject to PAYE and full Class 1 NIC. However, where the employer buys and pays for the cover on behalf of the employee, this is reportable on Form P11D subject to Class 1A NIC. A third scenario arises where the employee arranges the cover personally, but the employer pays the provider directly; this is reportable on Form P11D but subject to Class 1 NIC.

I would reiterate that the key is to ensure that enough details are provided within an expense claim to ensure that they are captured and coded correctly and as a result the appropriate tax treatment is applied.

What are HMRC’s current ‘Hot Topics’ in the employment taxes arena?

As highlighted, HMRC’s current focus is on policies and procedures, albeit that lack of these does not always necessarily mean that there has been a tax failure. Specific areas that HMRC are currently focused on include;

·     Termination payments – tax treatment of payments in lieu of notice

·     Employment status – is the individual running a business on their own account?

·     Company cars – has private fuel also been provided where the process for making good the cost or the reporting of business mileage is not robust?

·     Expatriate taxes – Does the business have a Short Term Business Visitors Agreement?

·     Construction Industry Scheme – Is the business adhering to the new rules?

·     Salary sacrifice schemes – Are these available to all, where appropriate? For example, do bikes to work exclude under 18s due to Consumer Credit Act restrictions?

HMRC are likely to always focus on the first three items as these are typically the areas where employers get things wrong.

You mentioned HMRC concessions; what benefits can be provided tax free?

Many employers implement salary sacrifice arrangements to help motivate employees and aid recruitment and retention.  These arrangement work by replacing pay subject to tax or NIC with tax  and/or NIC efficient benefits generating savings for both the employer and employee. Typical benefits within such arrangements include:

• Childcare
• Bicycles
• Holidays
• Workplace parking
• Mobile phones
• Staff discounts
• Travel & Subsistence payments
• CO₂ efficient cars

Such arrangements need to be carefully implemented to ensure that the appropriate tax/ NI exemptions are met.

So, what’s in it for me?

If you proactively embrace the new approach by ensuring that you maintain your employer compliance and build an open and honest dialogue with HMRC, reporting errors accordingly, you are likely to have fewer HMRC interventions which in turn could lower your costs. By disclosing areas of non compliance, you will also avoid the swingeing penalties that are often raised where HMRC unearths the issue itself.

HMRC want to better focus their time on looking at businesses which carry a greater risk and where there is a larger potential tax collection. As such, those with a low risk rating are not its first priority; the important thing is to stay that way!