PAYE Audits: avoid pitfalls and limit your risk!

HMRC PAYE audits are an unwelcome distraction for any business. The time spent managing the review is a diversion from daily operations and can prove to be extremely expensive.

HMRC focus on specific areas where the tax yield is likely to be commercially rewarding. Reviews can stretch back several years resulting in substantial settlements.

HMRC will commonly extend PAYE audits to include:

  • The broader tax affairs of a business (VAT and Corporation tax)

  • The personal tax affairs of senior employees

Seemingly harmless PAYE audits are therefore anything but – PAYE audits are a great way for HMRC to ascertain whether it is commercial to review other areas of tax compliance.

To limit your risk, consider the following:

  • Maintain records. Maybe it is a little optimistic to wish any business will maintain records in a manner that makes it easy to defend any PAYE enquiries. The manner in which a business maintains its records to demonstrate the treatment for PAYE or any other taxes may itself prevent any enquiries from escalating. A business should maintain records with a thorough audit trail to demonstrate the tax treatment.

  • Ensure monthly PAYE remittances are made on time. Where a business is unable to meet its monthly commitment to HMRC – keep HMRC informed. They are much more agreeable to businesses which approach them with view to entering into a payment plan to clear arrears rather than those that bury their heads in the sand!

  • End of year returns – forms P11D, share scheme returns and termination payment reports are due for submission by 6 July following the end of the income tax year. Late or non submission attracts HMRC interest. Share scheme and P11D returns will be routinely compared with the previous year’s submission for any obvious inconsistencies. Before submission, you should ensure you do the same. If you do not have a dispensation, remember that all expenses paid or reimbursed to an employee must be returned on the P11D.

  • Company cars and fuel – Is an employer able to demonstrate that no private fuel has been provided and that they have adequate records to demonstrate this? HMRC routinely review mileage records on site and if they can identify even a single mile of private mileage was paid for by an employer, a full car fuel benefit charge is in point. For a mid-range company car this could result in a tax cost for the employer in the region of £1,000 for a basic rate tax-payer (£2,000 for a 40% tax-payer). The numbers become interesting where the issue arises across a fleet run by the employer.

  • Consultants. Does the business engage consultants on a self-employed basis who may be considered by HMRC to be employees? If so, arrears of PAYE and NIC will be sought from the business.

  • Payments to departing employees. These are of interest to HMRC. Whilst there is an assumption that lump sums may be paid tax free on employment termination (up to the much touted £30,000) it should be borne in mind that this exemption is only applied where the payment is not otherwise taxed as being earnings related. HMRC scrutinise such payments and employers need to be sure the component parts of such payments are reviewed for tax. Remember that HMRC have more than one opportunity to review – on submission of corporate returns and then the departed employee’s self-assessment tax return. Any PAYE failure will rest with the employer.

  • Site-based employees. An employer which has multiple work sites with employees regularly travelling between them will often pay for the employee’s travel costs between the sites. It is important to clarify the type of duties carried out at each site – any indication that an employee has a regular/routine travel pattern will encourage HMRC to consider the tax liability of the travel costs paid.

  • Salary sacrifice. Are salary sacrifice arrangements entered into by the employee effective for tax purposes? If not, HMRC will seek to tax the element of salary foregone.

  • Entertaining expenditure. Where an employer pays for or reimburses the cost of staff entertainment, this is taxable. Whilst there is a limited exemption for a Christmas or other annual event, other “reward” events or off-site meals where staff only are in attendance, are taxable. Businesses need to ensure employees provide sufficient information to allow it to distinguish between (taxable) staff entertaining and non-taxable subsistence and business entertaining. This is a key review area for HMRC who consider the distinction is not generally managed well by employers.

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