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Employer Compliance Reviews (ECRs), more commonly known as PAYE visits, are an ongoing issue for many companies and we are supporting a growing number of clients who face enquiries of this kind. In fact, with roughly 30,000 reviews to check the accuracy of PAYE and NIC deducted each year, more ECRs are conducted by HMRC than any other form of tax enquiry. In addition, HMRC is running a new ‘Know Your Customer’ (KYC) initiative, through which it aims to ‘get closer’ to companies and better serve their needs.
Whilst this sounds very altruistic, a cynic might suggest it is actually a little more self-serving that it appears and KYC may simply be a new acronym for HMRC’s former Business Record Checks campaign. Although the KYC initiative is aimed at the largest employers, as PAYE visits are becoming commonplace and the yield from a visit averages £10,000 for HMRC, it is worth all employers being aware of the areas that tend to come under the spotlight during one of these visits or reviews.
A common misconception that can prove expensive is that an ECR will only look at payroll related matters, i.e. the calculation of PAYE and NIC deductions; in fact this is probably the one area that HMRC will not look at in too much detail. Areas of interest, and therefore records that will be reviewed, include expense claims, contractor and consultant invoices, entries on the Directors’ loan accounts and even a review of bank statements to check what payments the company is making.
Those employers who may have an issue with these PAYE matters and as a result have a greater risk of error in their tax affairs (and therefore are more likely to yield additional tax) are easy to identify from information HMRC receive during the year (e.g. P11Ds, Form 42, RTI returns) making them easy to target.
If you do find your company is targeted for an ECR, it is wise to have professional representation. Even in situations where the errors found are innocent mistakes, typically penalties start at 20% and in cases of deliberate tax evasion, can be as high as 100%. Getting your advisor to attend the visit (or ideally getting their input in preparing for it) can save you money as they may well be able to negotiate with HMRC on the level of penalties or even get them removed altogether if terms for suspension can be agreed.
The most common areas HMRC will look at when they conduct an ECR are:
Expenses claims
HMRC seem to view this as a high risk area because their opinion is that it’s likely to be a fraught with mistakes and inflated claims.
Typically HMRC will ask to see mileage logs to support any claims made and receipted expense forms to check that all claims have been authorized; where entertaining has been undertaken, the attendees should have been noted on the expense claim form or receipt. If the appropriate back up isn’t available HMRC may look to tax the payments made as additional income rather than the reimbursement of expenses.
Employment status
An age-old problem, the topic of employment status has been the subject of countless blogs in the past, especially within the construction industry, which has been identified as an avoidance area where there is significant risk of abuse of PAYE. The issue to be aware of here is the requirement to deduct tax and NICs from self employed workers if HMRC successfully challenge the individuals are employees. Where this is the case the additional liability to the business is the employer’s NIC that’s now payable along with interest and penalties (assuming of course that your workers tax affairs are up to date and they have paid all the tax and NIC that they should have done as a self employed person!)
Termination payments
There is a commonly help belief that termination payments of up to £30,000 are tax free – unfortunately this is not so. Some termination payments may qualify as not taxable but this is something that should be checked each time a payment is made in order to ensure that a PAYE deduction is made if appropriate.
Salary sacrifice schemes
Reducing tax liabilities with salary sacrifice is a popular way for many employees to access a variety of qualifying goods and services – from childcare to professional qualifications and family holidays. The cycle to work scheme is one example of a popular salary sacrifice scheme. However, it is also becoming increasingly common for companies to offer their employees a variety of benefits under a sacrifice scheme. Whilst many schemes are legitimate there are some that are not and these are ineffective. In addition the scheme must be properly documented to achieve the tax benefits that the company is aiming for.
What happens during an ECR?
If your company is targeted with an ECR, HMRC will normally look to arrange a meeting at your premises with the individuals responsible for finance and payroll matters. During this, they will be looking to identify whether there are adequate controls within the business with the emphasis on the common problem areas mentioned above. In addition, other aspects of PAYE compliance could be reviewed, for example, your administrative procedures for new employees and RTI compliance. Most reviews initially involve looking at records for a 12 month period; then, if issues are identified, the review period will be extended. It’s always wise to have professional representation during any meetings with HMRC because inadvertent remarks can be misinterpreted and answers given in haste based on poorly recollected information cannot be withdrawn.
If your company has been advised it will be having an ECR or if you think there may be an aspect of PAYE compliance that needs to be reviewed and you need expert advice, please contact Anne Eager by emailing ae@rjp.co.uk.
