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What happens during a HMRC PAYE & NIC inspection?

12 May 13 | By: Jas Jhooty

Introduction

hmrc logo

Because HM Revenue & Customs seeks to concentrate their resources in areas where they consider tax is being lost, they have in recent years increased the nature and scope of their compliance visits. This article explains what to expect during a HMRC PAYE inspection.

HMRC inspection frequency

A HMRC PAYE & NIC inspection (or Employer Compliance Review) does not occur every year. The average time between inspections is usually 6 years. In a few cases, an inspection can lapse between 10 to 15 years, however if your company have had past difficulties resulting in errors, an inspection can occur as frequently as once every 3 years.

Grounds for a PAYE inspection

While there is no specific reason required for an inspection, there are a few trigger points that increase your chances of having your company inspected. These can include: -

  • Returning company cars without fuel benefit on P11Ds
  • Forms P11Ds or P35 forms submitted late
  • Information on submitted forms found to be incorrect
  • HMRC having uncovered errors in similar businesses or industries

Employer Compliance Review Notice

The first indication that you have been selected for a PAYE inspection is via a phone call. The HMRC employer compliance officer will request a formal meeting with you to be held at your company’s trading address or head office and will request that you are present. It is imperative that you have professional representation with you at all times. This is because your adviser will be more aware of exactly what the HMRC officer is looking for and avoid common mistakes such as impromptu remarks regarding certain contractual arrangements during your meetings. Such remarks can arouse suspicion and lead to a deeper, more thorough investigation.

Confirmation letter

Once the meeting date is agreed, a confirmation letter from HMRC will be sent. In this letter you will usually find that there is a request to review specific records. The records that are most commonly reviewed are:

  • Payroll records
  • Expense claims
  • Cashbook and petty cashbook
  • Contracts
  • IR35 policy and practice

If a request is made for copies of contracts, HMRC will be conducting a full IR35 review. You should begin to prepare for a robust defence & definitely consider engaging expert representation if you are unsure whether or not you may fall foul of the IR35 rules.

What happens during the visit?

The HMRC employer compliance officer will check the following:-

  • PAYE calculations for completeness and accuracy
  • Correct use of employee codes
  • Reconciliation of the records with the P35
  • Correct treatment of new employees and leavers (P46 procedures)
  • Cash payments where PAYE has not been operated
  • Compliance with sub-contractors’ rules
  • Compliance with NIC regulations
  • Expense payments, employee benefits, and their correct disclosure on forms P11D or P9D
  • Compliance with terms of any dispensation
  • Problem areas

Common problem areas

The following are the main areas where problems may arise:-

  • Gross payments to casual employees
  • Private petrol
  • Spouse’s travel and subsistence
  • Travel to work from home and vice versa
  • Trips for purposes other than purely business
  • Home telephone
  • Entertaining
  • Expenses for use of home as an office
  • Club subscriptions
  • Work undertaken at an employee’s home
  • Medical expenses
  • Casual labour
  • Payments to alleged ‘self employed’ persons
  • Lump sum expenses
  • Goods and services provided free or below market value
  • Meal expenses and lunches in particular
  • Clothing
  • Accommodation

It is vitally important to fully document which records are given to the employer compliance officer to scrutinise. If they request any further information, make sure that this is submitted within 20 days of the visit. Your documentation of the visit should include what has been examined, the extent of the work, the findings, recommendations and conclusions.

What happens post-inspection?

Once an inspection has been completed the Employer Compliance Officer will explain what was wrong (if anything) and instruct you on how to satisfy the issue. In the case of significant inaccuracies, another visit might be in order. If your paperwork and presentation was in order and there was nothing found out of order, the officer will tell you that the enquiries are finished and complete.

If any issues are found

If inaccuracies are found, the Employer Compliance Officer should tell you immediately. If HMRC say that your company owes back taxes, they will try to reach an agreement during the visit.

Please remember that the Employer Compliance Officer is not always right and you are entitled to a formal explanation of the figures that they have calculated. You definitely have the opportunity to dispute any findings, as well as have the right to be professionally represented doing so.

If (unusually) you agree with HMRC and are not prepared to challenge their findings you can make a payment on account immediately, even if an exact figure is not set in order to avoid interest on any unpaid taxes.

Assessments and Appeals

After negotiations, if an exact figure cannot be agreed upon or if there is not enough information available, HMRC can make an assessment. If you do not agree with this assessment, you will have 30 days to appeal. This appeal can be requested to be heard at a Tax Tribunal and you have the right to supply the Tax Tribunal with the figures you believe are correct. The Tax Tribunal will then make a judgment based on both the figures and evidence presented to them.

Settlement

The vast majority of compliance visits result in some discrepancies being uncovered, and HMRC will usually calculate the ‘lost’ tax and NIC over a period of six years plus the current year. This period may be extended if they suspect that deductions have been withheld deliberately. HMRC will often seek penalties, which will normally depend on the gravity of the discrepancy and the degree of co-operation and disclosure from the employer.

Paying Interest and Penalties

It should be noted that HMRC can and will seek any penalties and interest if you fail to account for any tax, failed to make appropriate tax returns or have claimed excessive tax repayments. It should be noted that when a penalty is being calculated, the extent of the information, how helpful you were with the process and the seriousness of the issues are all taken into account.

How can we help?

We can assist in conducting a dummy PAYE audit with a view to identifying possible areas of non-compliance with PAYE & NIC regulations. If a visit is made we can advise on, and assist in, negotiating a settlement with HMRC

Do contact us if you would like further help or advice on this subject.

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