This article was featured in the November 2019 issue of the magazine.
HMRC’s compliance interventions now range from enquiries by letter to onsite reviews. Susan Ball, UK employment tax partner at RSM, covers the most common interventions and how HMRC’s approach is evolving
In recent years, HM Revenue & Customs (HMRC) has increased its activity by adopting a range of approaches. A compliance review might just cover general pay as you earn (PAYE) compliance, be an aspect review or part of a business risk review for larger employers.
However, over the last couple of years HMRC has also taken a desk-top approach, issuing a letter containing a list of questions to establish if an onsite visit or further interactions are needed. When a full review is instigated, HMRC will now often request details for the past three years instead of just one. This is an interesting development as, arguably, it changes the focus of the visit from that of a check to ensure an employer is compliant, to one where HMRC is also seeking to identify areas where errors have been made and to recover underpaid taxes.
For basic PAYE compliance checks, HMRC will want to speak to the people who deal with payroll, expenses and benefits and often human resources. In smaller employers this may be one person, but in larger employers it is likely to be at least different three people. In these circumstances, it is important that the employer is well-prepared, as any seemingly inconsistent or unclear information provided to HMRC in relation to a particular benefit or expense can lead to undue complications.
Business risk reviews
HMRC is likely to be engaging with the top 2,000 of the UK’s largest businesses in ‘real-time’, via customer compliance managers and as part of the business risk review (BRR) process which aims to identify emerging tax risks across the taxes and to resolve disputes at the earliest opportunity. In 2018/19, this area yielded £9.8bn.
HMRC has been piloting a new approach to the way it evaluates the tax risk profile of large businesses. The new BRR encompass changes to risk assessments which will formally apply from October 2019.
Historically, HMRC has conducted periodic BRRs which would lead to a business being designated as either ‘non-low risk’ or ‘low risk’. The new risk assessment process will provide for four categories of risk:
These categories will apply for each tax stream, of which employment tax is one, of course. Behavioural factors will be assessed for each regime and a behavioural risk rating awarded for each regime. Businesses will also be allocated an overall rating.
Methodologically, HMRC will consider three factors when assessing risk, namely: (i) approach to compliance; (ii) internal governance; (iii) systems and delivery.
Several factors will therefore be reviewed and are deemed important by HMRC when determining the risk ratings, including:
the senior accounting officer (SAO) process, which requires businesses to submit an annual declaration to certify whether the business had in place both the appropriate tax accounting arrangements and the appropriate documentation setting out the procedures and processes. A penalty regime operates for failure to comply with the SAO requirements
the criminal corporate offence under provisions of the Criminal Finances Act 2017. Businesses will be reviewed on their compliance, so that HMRC can understand what risk assessment has been performed and the steps put in place to mitigate any risks.
HMRC will also want to understand the controls that a business has in place and if and how they have been tested, whether internally by the business or by a third party. In other words, it is no use having a sound control framework on paper – you will also have to demonstrate that it is effective in practice.
As before, there are clear advantages associated with low-risk status which include fewer HMRC interventions.
...aims to identify emerging tax risks across the taxes and to resolve disputes at the earliest opportunity
Many businesses (and individuals) are receiving letters from HMRC requesting detailed information about things such as the employment status of contractors or national minimum wage (NMW) information.
This ‘nudge’ approach makes recipients aware of potential problems, often providing the chance to correct errors without the expense and stress of more in-depth enquiries. It also enables ‘innocent’ taxpayers to confirm that their affairs are in order. Recent examples include the following.
Letters sent to every large business to remind them of their SAO. These letters are generic and meant to remind only.
NMW letters where HMRC estimate that potential arrears owed are low and the number of workers is small. Under the NMW triage process for handling worker complaints, a nudge letter may be issued to the employer as the first response. Employers that receive the nudge letter rather than the inspection should think themselves lucky as, unlike an inspection, it will not lead to financial penalties and ‘naming and shaming’.
Letters to contractors about IR35; examples we have seen include a long list of questions, implying serious consequences for non-compliance. For example, an IR35 letter can ask over fifty questions about the nature of a contractual relationship.
Care should be taken when replying to these letters. First, you should consider the status of the information request. Unless HMRC raises a formal enquiry, statutory rights are not engaged, so informal requests can allow HMRC to bypass taxpayer rights when asking questions. Second, the responsibilities of the recipient to third parties. If an engager provides HMRC with detailed information about a contractor, does it risk breaching General Data Protection Regulation rules?
Unless or until HMRC changes its approach, recipients of nudge letters need to consider carefully how to respond. The best approach is to use the letter to think about whether there is a problem, and to respond either by making a disclosure in an organised way or by confirming that to the best of knowledge and belief, no action is required. Finally, it goes without saying that if in doubt take advice before doing anything at all.
...employers issued with a notice have historically been ‘named and shamed’...
HMRC is particularly active with NMW checks and have significantly increased the team undertaking them. There are now more than 400 NMW compliance officers, and in 2018/19 HMRC posted its highest figures yet, identifying over £24.4m in arrears. NMW is mainly enforced in the following two ways.
Encouraging workers to complain to Advisory Conciliation and Arbitration Service or HMRC if they have concerns. HMRC follow up all complaints, with statistics indicating that these make up approximately half of all NMW inspections. As part of this the government has raised awareness of NMW rights through social media, radio and TV advertising campaigns. For example, in 2018 HMRC sent out approximately 1.6 million texts to workers paid NMW to check that their employer was paying them the NMW and giving them details of who to complain to if not.
Targeting specific sectors. HMRC selects employers that have a high-risk profile based on factors such as business sector, geographic location and their history of NMW compliance. Targeted enforcement accounts for half of all inspections.
The process commences with a letter from HMRC confirming the NMW investigation and the proposed dates. Usually two inspectors will attend and will ask questions about the organisation, mostly around pay and working hours, and request copies of certain employment records. As part of its work HMRC will also speak to employees to help inform their conclusions.
HMRC will not usually allow self-correction once an employer has been contacted to initiate an investigation. Therefore, once contact has been made HMRC can issue a ‘notice of underpayment’ and penalties of up to 200% of the arrears, capped at £20,000 per employee.
In addition to the financial implications, there is significant reputational risk, as employers issued with a notice have historically been ‘named and shamed’ by the government’s business department even for small technical failures. The good news is that this is currently under review and may change.
It is clear that we have seen an increase in the number and type of interventions initiated by HMRC and that this is likely to continue for some time. It is equally clear that employers should not take these visits or letters lightly as the financial and reputational consequences are potentially significant.
In addition, employers that engage off-payroll workers should look closely at those arrangements, as experience has shown that the tax consequences of incorrect status can be costly especially given the imminent changes in this area.