Out-Law News 2 min. read

Increase in HMRC payroll investigations shows firms must step up compliance, says expert


Businesses must be careful not to cut corners when taxing more complex payments to employees, an expert has said, after HM Revenue and Customs (HMRC) reported a 31% increase in the number of firms suspected of payroll irregularities in a year.

Employment tax expert Chris Thomas of Pinsent Masons, the law firm behind Out-Law.com, said that the rise in employer compliance reviews conducted by HMRC in the year to 31 March 2013 showed that it was "increasingly dangerous" for employers to compromise on the taxation of termination payments or internationally mobile employees.

"From our experience, a lot of employers tend to 'take a view' on how they intend to tax payments to employees in order to fit in with what has already been agreed with the employee or what is commercially expedient - often on the assumption that HMRC is unlikely to ever look into it and perhaps without properly liaising with their tax teams," he said.

"The rise in employer compliance reviews suggests that in the new world that is an increasingly dangerous approach to take and once HMRC picks up even a few issues - whether through RTI or otherwise - employers can expect to be rapidly escalated up HMRC's 'risk register'. Employers should therefore consider seeking advice where there is any doubt as to the proper treatment and to enable them to properly assess the risks," he said.

According to figures obtained by Pinsent Masons, 2,099 businesses were under investigation over suspected underpayment of payroll tax or National Insurance as of 31 March 2013; up from 1,599 businesses in 2012 and 1,350 in 2011. According to Thomas, this increase will have partly been driven by the launch of the new Real Time Information (RTI) reporting regime, under which employers must provide HMRC with monthly, rather than annual, information on benefits provided to employees.

"A key aim of RTI from HMRC's perspective was to track more accurately what is actually going on in relation to the provision of benefits by employers, as the new returns require the provision of substantially more information than used to be the case; track patterns over time; and use that to target employers which it considers may have compliance issues," he said. "Clearly, HMRC is now doing exactly that."

"Obviously, the increased focus on compliance emphasises the need for employers to check that they have proper systems in place for capturing and reporting the benefits which are actually provided to employees – for example, are HR and payroll talking to each other enough, particularly in relation to employees with 'non-standard' benefit packages or internationally mobile employees," he said.

Some of the cases under investigation will involve 'pure' payroll tax evasion, such as where an employer keeps all of its employees' PAYE tax and National Insurance with the intention of keeping the money, or where a senior executive is given company cars or other job perks without paying tax on that perk. However, HMRC may also challenge a payment of a large, tax-free sum on the termination of an individual's employment to ensure that that employee was genuinely made redundant, or payments made to contractors who should really be treated as employees.

"Once HMRC finds one problem with an employers' payroll, it tends to keep on digging until it finds other problems," Thomas said. "So the whole process of a payroll investigation can be very time-consuming and expensive for a company."

"Businesses ought to undertake audits of their payroll before HMRC identifies the problems. Many of the problems occur when HR arranges for a change in an employee's benefits package, but doesn't tell the finance or tax team about the change," he said.

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