Normally, the review of all aspects of the operation of PAYE by particular employers is undertaken by units (both local and national) which specialise in this work. However, other offices also carry out PAYE enquiries. Special Civil Investigations (SCI) undertakes enquiries into the operation of PAYE if fraud is suspected.
Employer Compliance Reviews for employers with fewer than 1,000 employees will be carried out by the ‘employer compliance unit’ of the employer’s usual tax office. Reviews of larger businesses are carried out by the Large Business Office (Employer Compliance) Units. The emphasis in any enquiry carried out by these units is on expenses payments and benefits in kind provided to directors or employees earning £8,500 p.a. or more. Where, in an enquiry, fraud is suspected on a scale which seems likely to result in consideration of criminal proceedings, the case will be passed to SCI.
The degree of expertise and training amongst those who carry out employer compliance reviews varies considerably. Those carried out by the expenses or compliance units of local offices are usually dealt with by compliance officers under the supervision of an inspector, while a SCI enquiry will be carried out by inspectors assisted by compliance officers.
The difference in training and background of the various officials engaged in employer compliance reviews can lead to inconsistencies both in approach and interpretation of the law. If the adviser considers that the position adopted by HMRC personnel is not correct he should not hesitate to challenge it. A view confidently put forward by an HMRC official in the course of an employer compliance review might amount to no more than his personal understanding of the legal position. He should remember, too, that if he is unable to reach agreement with the compliance officer, he can insist that the matter be referred to the appropriate inspector in charge for a decision.
HMRC Tax Bulletin, Issue 77, June 2005, drew attention to inconsistencies in the approach of different officers when agreeing the treatment of tax and NICs on benefits and expenses to be included in an employer compliance settlement. It had been found that there was a lack of consistency over when to gross up payments for the purpose of computing the tax unpaid and when charging Class 1 NICs in respect of tax paid by the employer on the employee’s behalf.
Nor is error and inconsistency restricted to individual officers. After wrongly trying to collect additional tax and NICs in respect of staff gratuities as part of ‘Operation Gourmet’, HMRC had to accept that their official guidance to employers was wrong and withdraw it, replacing it with a new guide setting out what they saw as the correct position. In the event, even this was found to be incorrect by an Employment Tribunal which found that HMRC’s guidance that tips could be paid out of an independent tronc to satisfy the requirement to pay the minimum wage was wrong. The case concerned Annabels, a well-known London nightclub.
A degree of inconsistency is even accepted by HMRC for dealing with private use adjustments for board and lodging for hoteliers. Head Office intervened when they discovered that different local offices operated different policies for making private use adjustments. After public consultation, however, they decided that it was best to leave local offices to reach local agreements, even if this meant that there would be inconsistency between regions.
Company groups are normally inspected by the Large Business Office (Employer Compliance) Units. These units use a computerised management information system (group audit database) for case selection and monitoring case progress. The database provides information such as the size of the group, the locations of the employers within the group and the number of employees, the types of trade involved, details of any current and completed inspections and the audit offices and tax offices involved.
HMRC’s start to an employer compliance review is invariably low-key and routine. The employer will be asked if PAYE auditors can visit him to discuss his operation of PAYE. The visit will normally be at the business premises and it is important that clients be warned of this approach and advised to contact their professional advisers at once, even though HMRC officers are now under instruction to tell the employer of his right to be professionally represented.
The importance of this first visit by HMRC cannot be over-emphasised. If apparent irregularities which have occurred during the last 12 months cannot be satisfactorily explained, the enquiry will be extended over the previous six years. In discussions with the employer, HMRC will also try to establish the extent of culpability and this will dictate the penalty loading in any settlement. If, as mentioned above, it appears to them that there are indications of serious fraud, the matter will be referred immediately to SCI as a potential criminal proceedings case. With such serious matters under consideration, it will be appreciated that the presence of the adviser at the meeting is essential.