How to survive a PAYE and NIC inspection

HM Revenue & Customs review the records of about 50,000 small businesses each year. Are you ready and compliant? However confident you are that your records are complete and well maintained, a PAYE/NIC inspection might still catch you unawares. The introduction of Real Time Information is likely to provide HM Revenue & Customs with more targeted information on which businesses they might investigate in order to increase the tax yield. Here are some pointers to help you:

General

Make sure your RTI submissions are complete and made within the prescribed deadlines. You are required to retain all records and information relating to payroll, benefits, etc. for three years after the tax year end - but keep them for six years, the period for which the HM Revenue & Customs has powers to investigate your business accounts.

You are now more likely than ever to be subject to a full review of your compliance systems and procedures, so don't leave anything to chance.

Make sure you are not vulnerable to the risk of PAYE/NIC liabilities, penalties, and problems - sort them out now.

HM Revenue & Customs visit will be at your business premises and is likely to check:

• PAYE calculations for completeness and accuracy
• Correct use of employee codes
• Reconciliation of the records with the P35 (Employer's annual statement)
• Correct treatment of new employees and leavers
• Cash payments where PAYE has not been operated
• Expense payments, employee benefits, and their correct disclosure on forms P11D or P9D
• Compliance with terms of any dispensation
• Compliance with sub-contractors' rules
• Compliance with NIC regulations

Problem areas

The following are the main areas where problems may arise:

• Gross payments to casual employees
• Payments to alleged 'self employed' persons
• Lump sum expenses
• Private petrol
• Spouse's travel and subsistence
• Travel to work from home and vice versa
• Trips for purposes other than purely business, e.g. trade fairs, golf, social outings
• Home telephone
• Entertaining
• Expenses for use of home as an office
• Club subscriptions
• Goods and services provided free or below market value
• Meal expenses and lunches in particular
• Clothing
• Accommodation
• Work undertaken at an employee's home
• Medical expenses

Casual labour

Any employer paying £1 a week or more to any employee without a form P45 must request a form P46 to be completed. If the employee signs that it is his or her only or main employment, then PAYE and national insurance need not be deducted unless the payment is in excess of the national insurance primary threshold, currently £149 per week. HM Revenue & Customs is applying this procedure strictly and, where forms P46 have not been completed, charging employers for tax and NI contributions on the grossed-up amount of these payments, often regardless of whether or not any tax has actually been lost to HM Revenue & Customs.

Whether or not tax or NI is payable, you must keep proper records of payments and persons paid.

P11Ds

Your records must provide details of all relevant benefits for the tax year to 5 April.

Even if you are registered for VAT, your P11D records have to be VAT inclusive.

You must include travel, subsistence, and entertaining in the information you enter on annual forms P11D, even if incurred for business purposes (unless you have an official HM Revenue & Customs dispensation).

HM Revenue & Customs are likely to challenge all doubtful claims in regard to business mileage limit. This is relevant where you have a company car but have made arrangements to exclude a benefit in kind arising on fuel. Keep full mileage logs for every vehicle, whether owned privately or by the company - an inspection team would ask for evidence of business mileage.

The fuel scale charge is an 'all or nothing' benefit, so if the business pays for any private fuel and is not fully reimbursed by the employee, the employee must accept the corresponding private fuel benefit and you must report it on a P11D.

For all categories of expense/benefit, pay careful attention to anything incurred in the name of an individual director/employee, but paid or reimbursed by the business. NIC problems will arise if you do not treat this properly.

Because HM Revenue & Customs seeks to concentrate its resources in areas where it considers tax is being lost, it has in recent years increased the nature and scope of compliance visits.

Settlement

The majority of compliance visits result in some discrepancies being uncovered, and HM Revenue & Customs will usually calculate the 'lost' tax and NI over a period of six years plus the current year. This period may be extended if they suspect that deductions have been withheld deliberately. HM Revenue & Customs will often seek penalties, which will normally depend on the gravity of the discrepancy and the degree of co-operation and disclosure from the employer. Often the audit investigator will be looking only for tax and possibly national insurance on the 'income' not taxed, instead of effecting a gross position. Amounts treated as benefits would not be grossed up or included in the assessment of NI underdeduction.

How can we help?

We can assist in reviewing your wage and salary records with a view to identifying possible areas of non-compliance with PAYE & NI regulations. If a visit is made we can advise on, and assist in, negotiating a settlement with HM Revenue & Customs.

Do contact us if you would like further help or advice on this subject.