Employment tax expert Chris Thomas of Pinsent Masons said that a reported 13% increase in the number of investigations into suspected non-compliance opened by HMRC last year should be taken by companies as a sign to "get their houses in order". Employment tax is a complex area and HMRC can levy fines of up to 30% of the tax owed even in cases of genuine human error, he said.
"HMRC has identified employment taxes as an area where there is a lot of low-hanging fruit," he said. "This is partly because the rules can be complex to understand and very fact-specific, but also because it generally involves a lot of different stakeholders across the business and there is a lot of opportunity for things to go wrong."
"Areas such as internationally-mobile employees can prove challenging for employers when calculating the amount of tax to be paid. It can be difficult to determine how the rules of different jurisdictions interact and how much tax needs to be paid in the UK, especially in relation to short- to medium-term assignments. Communication can also be disjoined between the departments responsible for employment tax in each country, and also between payroll, HR and the in-house tax team," he said.
HMRC opened 2,488 'employer compliance reviews' in the year ending 31 March 2015, compared to 2,197 over the previous year, according to its latest figures. It uses the employer compliance review process to target businesses which are under-paying employment taxes, and can levy fines of 10-30% of the tax owed unless the business can show that it took "reasonable care" to avoid any errors.
In cases where HMRC believes that an employer has intentionally attempted to evade or under-report employment taxes, it can issue fines of up to 60% of the tax owed. Thomas said that although it was often difficult for companies to prove that they took "reasonable care", especially those with large, diverse and internationally mobile workforces, "pro-active" engagement with HMRC and a commitment to identifying and addressing areas of weakness could often act to minimise penalties.
"The tax director of a business might not have the capacity to be in day-to-day control of how employment tax is handled," he said. "Additionally, the responsibility for paying taxes often falls to staff in departments such as HR, who might not have the specialist knowledge to deal with complex tax arrangements."
Companies are most likely to make mistakes where internationally mobile employees and questions of employment status are involved, or in relation to termination payments, Thomas said. Termination payments in particular can include a wide range of individual payments, each of which with its own tax rules, he said.
"Redundancy pay-outs, payments settling a claim and payments in lieu of notice can all be included in a termination payment," Thomas said. "Each of these might well have a different tax treatment, but businesses will often fail to make the necessary distinction and wrongly treat the whole termination payment in the same way."
"Employers would be well advised to get their houses in order, review the robustness of their systems and disclose any historic problems to HMRC before it comes to them," he said.