If you have employees, you’ll know all about the joy that is maintaining payroll and the PAYE system – or paying someone else to do it for you!
What you may not have yet had is the pleasure of a compliance visit courtesy of Her Majesty’s Revenue and Customs (HMRC). With public finances now under severe pressure, the odds are quite high that you may be privy to such a visit.
As part of its duty to ensure the tax system is working properly, HMRC visits employers to make sure that they’re operating PAYE correctly. The aim of these visits can be as much educational as it is to penalise employers.
It’s fair to say that HMRC officials would prefer to find a totally compliant business with clean records and a 100% on-time payment record. That’ll not stop you worrying about what might be lurking in your payroll records if HMRC does announce that it wishes to pay a compliance visit.
What to expect, then, and how to plan for it?
Common procedures in place
Since April 2009, HMRC has had in place common procedures across all the main taxes for ‘in year’ checks of taxpayers’ records and procedures. Thus the basics are the same if you’re registered for PAYE, CIS, corporation tax or VAT.
The first step is a letter or phone call from HMRC announcing its intention to visit and inspect your records. While you cannot stop them inspecting business assets, records or premises, HMRC cannot inspect or enter purely private dwellings without your consent (although remember that, if you keep the business records at home, then it’s not a ‘purely private dwelling’).
HMRC must, however, afford you at least seven days notice unless you agree that the inspectors can pitch up earlier. There’s a power for HMRC to make unannounced visits, but these are more commonly known as ‘raids’.
Raids have to be signed off at a very senior level in HMRC. If the Government has enough grounds to raid you, the best advice we can probably give is to hire a very good lawyer!
Once you receive a notice, you should let your accountant or payroll provider know about the visit. You can ask them to attend during the visit, or even pass the responsibility on to them if appropriate.
Remember they will probably charge for whatever this involves, but having an expert alongside you when HMRC starts asking questions can save a lot of problems later on that have been caused by simple misunderstandings.
If someone else prepares the payroll then make sure you speak to them on a regular basis. Lack of communication can cause real problems: consider the multinational whose tax team only found out half way through a PAYE visit that the HR team had given all the sales force an LCD television each for Christmas as a special bonus without accounting for any tax on the benefit in kind…
What is happening… and why?
HMRC should provide you with a list of what the investigators will want to look at. If they don’t, ask them for one.
They should also send you an information sheet explaining in a bit more detail what’s happening and why. They will probably want to concentrate on unusual items: benefits in kind (see above) and expenses claims for, say, travel and new starters/leavers, for example.
Hopefully the documents won’t be too hard to get at given how often payroll is run, but if at all possible do check them before handing them over to make sure matters are all in order.
Don’t be afraid to check exactly what HMRC wants to see. It will save time and effort for them in the long run, and worry for you.
All staff sent out on visits to businesses will have attended specific training and should be sympathetic. However, there may not be much point asking them why you have been selected for a visit: the answer is almost always that you have been selected randomly and, in most cases, this is true.
If it’s not convenient to have HMRC visit your business premises you can arrange with them to have the meeting take place somewhere else (at your accountant’s offices or possibly at HMRC’s own offices). However, you will need to give them a good reason why (lack of space, for example) and they will always reserve the right to visit your business.
You should know who’s coming and what they need in the way of a desk or office space in order to examine your payroll records. HMRC is entitled to look at your ‘statutory records’ (that is, the information you are legally obliged to retain as part of your PAYE responsibilities). That will not include VAT or corporation tax records on this visit.
HMRC will also want to look at how your systems work as well as the information you’ve stored in them. If you have a set process, you’ll need to explain that to the inspectors at the outset.
If you don’t actually do things ‘according to the manual’, the officer(s) will ask you why so be ready to explain.
Demonstration of computerised payroll
If you run a computerised payroll system you may well be asked to demonstrate it. However, HMRC officers are instructed not to enter any data into a live system, download copies of the software or remove the computer itself without referring to their own internal specialists.
They can ask for electronic copies of data from the computer, and may ask you to provide these instead of printouts.
In the long run, it will almost certainly be cheaper to have a blank CD to hand and co-operate with the officers requests. If they really want to, HMRC can obtain a warrant to remove the entire machine.
If your preparation has highlighted any problems or mistakes, let the officer(s) know. They will be more sympathetic, and you are far less likely to have to pay any penalties. They may even be able to help set things right more easily and save you time and money in the future.
The Revenue’s internal guidance says that case officers cannot ‘search, rummage or wander round unaccompanied’ without your consent, so it would be wiser not to give it!
Don’t be afraid to offer them tea or coffee: they are human after all – but ask them to let you know if they need a refill, rather than giving them free reign to wander round the place.
Warn your staff before the visit
If you’ve staff who’ll be around on the day, warn them what is going on and not to share anything with the case officers. Those officers shouldn’t ask questions in the first place without checking with you, but better to be safe than sorry.
HMRC should let you have any paper records back unmarked and undamaged. Case officers are allowed to take copies, and will usually ask you to do this. If they need to take them away to their office for copying (because you cannot or will not copy them) they have to return them unharmed, but bear in mind that this will slow things down.
Ask for a receipt, and if you need the documents in the meantime then the case officer should give you a free copy “without delay”.
HMRC can ask to return documents by post. If you agree, it will be by registered/recorded delivery. If they return them by hand they will ask you for a receipt, which (once you’ve checked there’s nothing missing) you should let them have.
If HMRC lose any of your documents then they are required to give you ‘reasonable compensation’ to put you back in the position you were before they lost the document(s).
If you’ve got an iPhone or similar, you could consider taking photos of the documents and offering those to the case officer as an ‘electronic copy’ (it’s a tactic many accountants now use instead of scanning).
Something wrong on the day
If the case officer finds anything wrong on the day, they should let you know and give you the opportunity to explain what has happened.
Don’t be afraid to ask for more time to find out answers, or for time to discuss things with your accountant or other advisers.
It’s always better to provide one definitive written answer than try to rush into things which may cause misunderstandings or make mistakes.
If there are serious problems then case officers may need to take records away, and might discuss penalties with you (although those penalties will have to be confirmed in writing).
They should give you a further fact sheet setting out the potential courses of action. There are specific help sheets on: ‘What happens when we find something wrong’, ‘Penalties for errors in returns or documents’ and ‘Suspending penalties for careless errors’ (among others).
Remember that if you have made a genuine mistake, HMRC can suspend the penalty. You’ll need to sign up to Terms and Conditions (basically to help avoid future careless mistakes), but if you’ve tried to cover things up or deliberately pay too little PAYE this will not be an option.
For serious defaulters (broadly, GB pound 25,000 or more of tax evasion), HMRC has the power to publish your details on their website in a ‘naming and shaming’ exercise.
Of course, there’s always the possibility that HMRC will find out you have overpaid tax. If so, they should repay it as soon as is practicable. There will not be any penalties, but they should try to help you understand what went wrong so you can avoid making the same mistake in the future.
Failing to prepare is preparing to fail
Provided you’ve prepared sensibly, a PAYE visit should hold no fears for you whatsoever. If you have any worries or problems then be up front with HMRC about them.
At the end of the day, a good case officer should be prepared to help get the right amount of tax paid with the minimum fuss for everyone.
Try to view the HMRC visit as a way of making sure you’re complying with your legal obligations rather than as an unproductive day.
Remember… it’ll take more than one day to sort out a full blown enquiry, so don’t give HMRC the excuse to start one!
Jason Piper is a technical officer at the Association of Chartered Certified Accountants and a chartered tax advisor (with extensive experience of UK taxes gained in both Big 4 and niche advisory tax practices, including advice on payroll taxation and PAYE audits for clients employing anything from 1 to 1,000 people)
