What is the background?
HMRC undertake reviews to ensure employers are complying with their tax and National Insurance (NI) obligations.
Historically, employers could have been selected at random, usually every six years or so, and HMRC would often visit employers’ premises to carry out their review.
HMRC now adopt a risk-based approach to deciding which employers to review. They use data available to them to focus on those they consider are most high risk, and they may undertake reviews more frequently. For example, late returns or payments by an employer may result in a review. Employers now usually receive a letter and questionnaire from HMRC to complete, rather than receiving a visit. HMRC will then interrogate the answers and ask supplementary questions.
What is the issue?
If HMRC identify any errors, they will pursue the employer for the tax and NI liability. Those liabilities, which include interest and potential penalties of up to 100% (200% for National Minimum Wage failures), are often substantial as HMRC may seek liabilities for up to six years.
In addition, if a taxable benefit, such as a company van, has been incorrectly dealt with, HMRC will usually calculate the liability using a taxpayer’s highest marginal rate of tax on what is known as a grossed-up basis. For a 40% taxpayer that calculation method equates to an effective tax rate of almost 90%. A van benefit for a 40% taxpaying employee that has not been included on a P11D would result in an employer liability of over £20,000, taking into account the previous six years (plus interest and penalties on the liability).
Tax and NI legislation is complex. Some of the current hot topics and danger areas include:
- Status of workers
HMRC will look closely at any worker who is not on the payroll and subjected to PAYE.
- Coronavirus Job Retention Scheme (CJRS)
Given the multiple changes to the rules over the period of the CJRS and the options available to employers, HMRC are of the view that significant overclaims many have been made.
Mistakes often arise in respect of deductions from wages, not just payments at the wrong rate. With a potential 200% penalty and HMRC’s naming and shaming regime, a mistake may not only give rise to a substantial liability, but also reputational damage as well.
- Termination packages
HMRC are likely to focus on notice pay and the application of tax exemptions.
- Company cars
Common mistakes are in relation to list price, accessories, C02% and the treatment of private fuel. In addition, if an employer offers a cash alternative, this may have an impact on the taxable benefit.
- Company Vans
HMRC will review vans not shown on P11Ds and also check whether any should be cars for tax purposes.
- Pool vehicles
It is not easy to satisfy the conditions for pool car treatment. HMRC will check to see that all are met.
- Salary sacrifice
There could be a significant liability if a mistake has been made where a lot of employees will have taken part, for example pension salary sacrifice.
- Staff entertaining and gifts
HMRC will look to see that the correct exemptions have been applied and taxable benefits have been shown on P11Ds or PAYE Settlement Agreements.
- Payment of tax and NI free allowances
Employers will need to explain to HMRC why they consider the allowances, which for example may be for subsistence, are paid free of tax and NI.
What do employers need to consider?
Employers need to:
- Be ready for any HMRC review;
- Manage their risk;
- Identify any areas where they have a concern;
- Consider if they need to approach HMRC to disclose any errors, before HMRC contact them; and
- Ensure they are able to explain to HMRC why they have adopted a particular approach.
How can UNW help?
As soon as HMRC contact an employer about a review the opportunity to make a disclosure and potentially reduce any penalties is gone. The ideal scenario to minimise penalties is to undertake a review, then make any disclosure to HMRC before they make contact.
Our employment tax specialists have expertise in Employer Compliance Reviews. They regularly undertake reviews (effectively mock HMRC reviews) for clients. However, unlike an HMRC review, our review will also identify tax planning opportunities and strategies to minimise risk.
Our reviews typically proceed as follows:
- An on-site meeting;
- Completion of a questionnaire, similar to HMRC’s, and a discussion in respect of potential areas of risk;
- Clarification of points and quantification of potential liabilities;
- Feedback report; and
- Disclosure to HMRC, if necessary.
If you would like more information about this, or any other employment tax related matters please contact:
Employment Taxes Partner
T: 07810 852 362
Employment Taxes Senior Manager
T: 07392 870 199