It’s open season

25 October 2018

This article was featured in the November 2018 issue of the magazine.

In recent years we have noticed an increased tendency on the part of HM Revenue and Customs’ (HMRC’s) Public Bodies Group to issue payroll-related information requests to public sector employers, in particular those in the emergency services. Last year, for example, HMRC issued a request to emergency service employers for information relating to travel expenses for employees with ‘dual workplaces’, requiring employers to confirm that they had understood the rules and have undertaken, or intended to conduct, an internal review to identify and eliminate possible compliance failures in that area.

We have also seen examples of lengthy questionnaires issued by the same body to local authorities requiring information relating to their pay as you earn income tax, corporation tax, value added tax, and general governance functions. These requests usually require a thirty-day turnaround which, taking into account postal delays and the complexity of the data required, increases the pressure on payroll staff and creates the potential for unintentional omissions and errors with the attendant risk of penalties. 

The purpose of the requests is three-fold: 

•  to obtain hard data about the employer’s operations in a specific area of tax compliance

•  to request confirmation that the employer understands and is implementing the relevant legislation, and 

•  to ensure the employer makes ‘a disclosure of any issues arising’. 

HMRC’s most recent information request, issued to police and fire authorities in September 2018, relates to the new legislation at section 402 E-A of the Income Tax (Earnings and Pensions) Act 2003, effective from 6 April 2018, covering employee termination payments. These new rules set out the employer’s obligation to identify and tax the post-employment notice pay (‘PENP’) element of an employee’s termination settlement. 

The data required includes various matters typically associated with the termination of an employment, such as the transfer of assets to employees (usually cars) and the subsequent re-engagement of departing employees on self-employed or agency terms. The information requested includes names, National Insurance numbers and details of the leaving and re-engagement terms. The re-engagement question can have implications for employment status and ‘IR35’, as well as for employees retiring under the protected pension age rules.

One might have thought that an employer’s statutory returns would be sufficient to provide HMRC with this information. Certainly, hard-pressed payroll staff have enough on their plates keeping up with their existing accounting and reporting obligations. So why is this additional administrative burden necessary?

HMRC says it has three strategic objectives: 

• to maximise tax revenues and challenge avoidance and evasion 

• to transform tax and payments procedures, and

• to deliver a professional, efficient and engaged organisation.

HMRC aims to achieve these by promoting tax-compliant behaviour “as early as possible in each customer’s relationship with us…enabling customers to get their affairs right from the outset using the data we have by spotting mistakes and identifying and targeting the areas of greatest risk”.

That’s all very well, but what statutory powers does HMRC have to request this additional information in the letters we have been seeing? 

Schedule 36 to Finance Act 2008 allows HMRC to access information and documents from a number of different sources, primarily the taxpayer directly and third parties known to the taxpayer. This enables HMRC to issue a taxpayer notice to an employer requiring them to provide relevant information or documents. There is a £300 fixed penalty for an initial failure to comply with a notice and a penalty not exceeding £3,000 for supplying HMRC with inaccurate information in response to an information notice. 

If the information requested forms part of the taxpayer’s statutory records there is no right of appeal against a notice. For other HMRC requests, the taxpayer may appeal against the notice or any requirement in it to an independent tribunal. 

Schedule 23 to Finance Act 2011 also enables HMRC to collect bulk data. Information obtained under this schedule can be compared with data HMRC already holds (e.g. the taxpayer’s returns and accounts) for HMRC to identify any mismatches and target possible non-compliance using the appropriate ‘compliance activity’.

HMRC clearly doesn’t think this goes far enough. In its consultation document Amending HMRC’s civil information

powers (https://bit.ly/2KNzo5B), published on 10 July 2018, HMRC set out its wish-list for extending these information gathering powers. 

This involves the removal of certain barriers to their actions, such as the requirement for HMRC to obtain approval from tribunal and its associated processes for requesting information and imposing penalties. This is necessary, HMRC claims, because the checks and balances in the current rules “can add a great deal of time to the information gathering process…and leave the UK out of line with the rest of the world and…out of step with new innovative approaches to sharing information”.

Clearly, the recent HMRC information requests received by public sector employers are likely to become an increasingly prominent part of the tax compliance landscape for those involved in payroll.