It would appear that the power of the tax collector increases with each passing year. This really shouldn’t come as much of a shock considering the shaky situation that the UK government’s finances are in right now. The national debt of the United Kingdom is now estimated to be around £2.6 trillion, and the country runs an annual deficit of £328 billion.
Because of this, the Treasury needs every single cent of tax money that it can get its hands on, and the job of collecting it rests on HMRC. One of the ways in which they accomplish this goal is by locating places in which they believe that the amount of taxes collected is lower than it might be or where it is being lost.
They then make use of internal teams to undertake in-depth investigations into both persons and corporations, with the goal of recouping any taxes that may have been avoided or evaded in the process.
The epidemic has only made this tax gap problem worse, and the HMRC is aiming to extract as much money as can from investigations in order to make up for all of the income that was lost owing to the disruption caused by Covid-19.
‘Tax investigations cost small businesses an average of £18,400 each’
The average amount of tax money earned through investigations against people and small firms has climbed to £18,400, up from £17,500 the previous year.
In addition, smaller firms are more likely to be targeted since they do not typically have the in-house specialised skills necessary to properly manage an investigation.
One of the aspects that small and medium-sized enterprises (SMEs) need to be aware of is the possibility of HMRC conducting a review of their payroll in order to determine whether or not it is managed in accordance with the rules and regulations outlined in the Employer’s Further Guide to PAYE and NICs publication.
In this piece, I’ll discuss what kinds of things a PAYE compliance audit is likely to examine, as well as the best ways to shield oneself from the scrutiny of the tax collector.
Why payroll is likely to fall under the taxman’s gaze
PAYE is an acronym that stands for “pay as you earn,” and it refers to the method that is used in the UK by HMRC to collect income tax and national insurance payments from workers of organisations when those employees earn earnings. You, as the employer, are responsible for deducting all of this from the wages of your workers and then remitting it to HMRC on a monthly or quarterly basis.
The administration of a payroll has, over the course of the years, become progressively more difficult as a result of the introduction of regulatory obligations such as auto enrollment in pension plans and RTI reporting. Due to the increasing complexity of the situation, there is no guarantee that you will be in full compliance with all of your PAYE requirements unless you are quite certain of what you are doing.
The Small and Medium-Sized Enterprises (SMEs) sector is well aware of this issue, which is why HMRC conducts PAYE audits to evaluate the degree of payroll compliance. In cases where it finds problems, HMRC will determine the amount of tax and national insurance that was not collected during the past six years. However, this is not an ironclad regulation; HMRC has the authority to extend the deadline and impose additional fines if they so choose.
What will HMRC check?
Representatives from HMRC will conduct checks in the following main areas:
- Correct use of employee tax codes
- Working sheets for PAYE deductions
- Where PAYE has not been used, evidence of cash payments
- Correct administration for new employees and leavers
- Reconciliation of the records with the Final Full Payment Submission (FPS) and/or Employer Payment Summary (EPS) for the tax year
- Compliance with all NIC regulations
- National Minimum Wage compliance
- Right to work and identity checks being maintained
- Benefits provided to employees, in line with trivial benefits rules
- Expense payments and their disclosure
- Use of freelancers and sub-contractors in relation to IR35 tax rules
PAYE areas where inconsistencies are likely to arise
Due to the fact that PAYE audits are very organised in terms of what agents from HMRC will be looking for, it is feasible to anticipate what might lead to problems. Not only does this help to identify areas of concern in the short term, but it also ensures that you can plan for and mitigate any problems that occur in the first place by being aware of the processes that are required to ensure that everything remains above board. This is because you will be aware of the processes required to ensure that everything remains above board.
There is a high probability of problems occurring in the following areas:
- Payments to suspected ‘self-employed’ people
- Lump sum expenses
- Purchasing of petrol for private use
- Payments to spouses for travel and subsistence
- Gross payments to casual employees
- Staff rewards
- Travel to work from home and home to work
- Trips unrelated to business activities such as social outings and trade fairs
- The use of a home as an office for the purpose of expenses
- The trivial benefits system
- Medical expenses
- Home telephone
- Club subscriptions
- Lunch related expenses
- Where goods and services have been provided free/below market value
- Work undertaken at an employee’s home
What should you do if you are selected for a PAYE audit?
It is not unusual for anomalies to be identified given all of the many items that HMRC is analysing and searching for. In order to protect yourself against this, it may be prudent to have your consultants undertake an investigation into the pay and compensation information of your workforce. They are able to discover any possible PAYE and NI inconsistencies prior to a visit using this method.
In the case that the tax collector has already carried out their inspections, it is highly recommended that you seek the assistance of a competent advisor in order to assist you in negotiating any prospective settlement with HMRC.
What to remember in a PAYE audit?
A PAYE audit should not, on the whole, cause a person to lose sleep at night. The anomalies that are revealed by HMRC are frequently straightforward accounting errors, the likes of which are more likely to occur in smaller firms that do not have substantial finance teams.
Because of this, it is essential to collaborate with a reliable professional adviser if you want to prevent anomalies and contradictions in the reporting of your financial information. Not only does this relieve some of the stress associated with the risk of a PAYE audit, but it also makes it simpler to make end-of-year tax payments and to plan for the budget.