There have always been examples of the deliberate manipulation of the PAYE system by employers, for either their own or their employees’ advantage. Payment to the collector of the amounts deducted from remuneration might not be made on time, additional remuneration might be disguised as expenses payments, or benefits provided to the employee but not declared to HM Revenue & Customs (HMRC).
However, in many instances employers will have acted entirely in good faith. They might have paid expenses for travel and subsistence which they genuinely thought should be paid tax-free, but, because of a misunderstanding over what HMRC would consider to be the employee’s base, they find that they should have been deducting tax and NIC. Also, because of the proliferation of benefits packages and the piecemeal legislation designed to deal with them, the employer might fall foul of a regulation which he did not know existed. Whilst his innocence might avoid his having to pay a penalty, the arrears of tax and NIC due (usually for the most recent six years) might be so large in total that it is not unusual for a small business to be crippled by the charge.
Expenses and Benefit Reviews
In the early 1980s, district tax offices commenced a policy of reviewing the reporting by limited companies of benefits and expenses of directors and senior employees. At first, such reviews were conducted by lower-grade tax officials, who had little or no training in the legal basis of Sch. E (now Income Tax (Earnings and Pensions) Act (ITEPA) 2003) and the PAYE regulations. However, it soon became apparent that significant amounts of tax were not being collected, because they were not being reported.
The main areas in which tax was being lost were:-
- failure by employers to report benefits and expenses paid to directors and senior employees;
- failure by the directors and senior employees personally to report benefits and expenses received;
- failure to operate PAYE in relation to casual or temporary employees;
- treatment of employees as self-employed; and
- failure to pay tax deducted under the PAYE system to the Revenue on time.
Employer Compliance Units
The success of benefits and expenses reviews in discovering and collecting significant amounts of unreported tax (and National Insurance contributions) resulted in a more systematic approach to PAYE investigations. An Employer Compliance Unit was set up in each Tax District Office and large PAYE office, such as London Provincial districts. The units are staffed by officers engaged exclusively on investigating the operation of PAYE by employers.
Revenue and former Contributions Agency employer compliance teams were integrated into new Employer Compliance Units from 1 April 2000. These teams cover all matters relating to tax and NIC liabilities in a single review.
Business Support Teams
HMRC have set up local Business Support Teams to assist small employers with payroll matters by giving general advice on the operation of PAYE, including what records they should keep. They also review the way in which PAYE is being operated and check that it is producing the correct result.
Visits are only made at the invitation of the taxpayer. HMRC have given assurances that no information obtained in the course of a visit by a Business Support Team will be passed to the Employer Compliance Unit.