Employer compliance work by HMRC usually comprises a comprehensive and detailed review of:-
Employer compliance and PAYE audit functions are now merged to form one unit and compliance visits have been combined in a single review by one officer. Previously, employer compliance officers carried out the benefits, etc. reviews, whilst the function of PAYE auditors (who were part of the Collection branch of the Revenue) was to inspect employers’ records to monitor the operation of PAYE for employees.
Where whole caseworking is not operated, the accounts inspector is notified of the result of each employer compliance review. If the review has indicated accounts irregularities (e.g. large unvouched round sum allowances or inadequate records as regards cash control), these will be highlighted in the report to the accounts inspector with a view to the case being taken up as an enquiry (the ultimate settlement of which would include the employer compliance settlement). Employer compliance staff are themselves not permitted by the Board to investigate potential accounts irregularities as they are not trained to do so.
In the new office structure which has been introduced, accounts inspectors and employer compliance staff are normally located in the same building, making effective liaison easier and with less likelihood of, as has been alleged by HMRC, accountants sometimes playing off one investigator against another. Often, a liaison officer is appointed in the accounts office to handle day-to-day contacts with employer compliance and regular meetings are officially encouraged.
‘Close liaison with the Accounts Inspector is an essential feature of employer compliance work in all types of office, as investigation of directors’ affairs is often inseparable from examination of company’s accounts.’ (ECM 6002)
The liaison between accounts inspector and the employer compliance unit also results in cases being taken up for an employer compliance review as a result of information from the accounts inspector pointing to PAYE irregularity. Inspectors are instructed to consider, at the time of screening, debits in the profit and loss account which indicate potential PAYE irregularities, e.g.:-
Inspectors are also under instruction to report to the employer compliance unit anything they come across in the course of an accounts enquiry which indicates PAYE irregularities.
The sort of information which the accounts inspector would be expected to pass to the employer compliance unit would be:-
Compliance officers are instructed to report to the accounts inspector any evidence of irregularity which might suggest that the employer’s accounts are unreliable.
‘This could be where:-
The Employer Compliance Manual at ECM 10160 provides officers with a checklist of some of the indications of evasion of tax which would merit such a report to the accounts inspector:-
‘[This] is intended only as a guide [and] is not exhaustive …
Does the workforce on the books look like the workforce on the premises?
Are there indications of shiftwork (and possibly an additional workforce paid through a second set of books)?
Does the business look prosperous?
Have there been any recent improvements or alterations to the premises?
Is the apparent lifestyle of directors in keeping with the level of remuneration?
Are any directors paid less than employees?
Do the directors control the wages records and payments?
Is the wages clerk related to the directors?
Are cash wages paid?
Are significant round sum payments made? (Even if you are satisfied that these represent genuine business expenditure, large amounts paid without supporting documentation point to a lack of control).
Is there a large casual wages charge (that is, large relative to the size of the business)?
Are wages paid to domestic staff or gardeners?
Do spouses or other relatives receive excessive wages?
Is there the opportunity to earn extra income, for example farmers renting out spare fields or machinery?
If the main income is by cheque, is there a subsidiary business generating cash?
Are the directors personally in control of cash?
Do the directors keep control of the cash/petty cash/cheque books?
Is there a poor system of cash control?
Are there cash takings where you wouldn’t expect them?
If there is a high level of cash takings, is it all banked?
Is cash on hand kept at a steady level or does it fluctuate?
What was the cash on hand figure at the beginning and end of the year?
Are the records inaccurate, not up to date, written up after a period from memory and not from vouchers and receipts?
How often is the cash book balanced?
Is personal expenditure paid by the business?
Is there expenditure not supported by receipts or vouchers?
Is there evidence of altered or false invoices, that is where Special Compliance Office (SCO) have not taken up the case?
Are unusual benefits provided (for example yachts, caravans, holiday homes, trips abroad, fines paid, school fees, upkeep of animals, prizes awarded by third parties)?
Are round sum entertaining expenses paid?
Are any company vehicles rarely used for business (including those used by relatives)?’
Prior to the merger of the Inland Revenue and HM Customs and Excise in April 2005 to create the new department HM Revenue & Customs (HMRC), information was regularly exchanged between ‘authorised officers’ of Revenue and Customs:-
‘for the purpose of assisting them in the performance of their duties’. (FA 1972, s. 127)
Where evidence which suggested evasion of VAT was discovered during an employer compliance review, it was generally passed on to Customs through the appropriate channels.
After its creation, HMRC issued a notice explaining how the powers of the two merged departments will be used. This confirmed that the powers previously exercised by one department will be used only to enquire into the taxes previously administered by that department. It was made clear, however, that there was no bar to passing on information discovered by any officer to assist another officer enquiring into another tax.
In 1996 it was announced that the DSS was to be allowed to pass information to Revenue and Customs:-
‘The Inland Revenue and Customs and Excise will receive more information to aid closer working and help tackle tax evasion. This is as a result of the Chancellor’s proposal today [26 November 1996], with the support of the Secretary of State for Social Security, to allow the Department of Social Security to pass social security information to Customs and Excise and the Inland Revenue.
The provisions came into effect on 2 July 1997 (FA 1997, s. 110).
From April 1999, with the merger of the Revenue and the Contributions Agency resulting in the formation of the National Insurance Contributions Office (NICO), the Revenue commenced the process of integrating NIC work with employer compliance work. During 2000–01, the new employer compliance units undertook a major training programme to provide the full range of skills to all team members. From April 2001, employer compliance teams cover all matters relating to tax and NIC liability in a single integrated review.
A Deregulation Task Force was set up in 1994 to advise, amongst other things, on how government departments could ease the administrative burden on employers. As a result of their recommendations, a joint working programme was created between the Revenue and the Contributions Agency, which in turn recommended that employers should generally have a single review to cover both tax and National Insurance and that unnecessary visits, or visits in quick succession should be avoided. Procedures were therefore put in place to ensure that there was the necessary liaison between departments.
Employment income is chargeable on the earnings from any office or employment. Earnings are very widely defined to include:-
An employer compliance review will therefore be concerned primarily with:-
Because of the less stringent rules governing the allowability of business expenses under Sch. D, there is an incentive for employees to accept classification as self-employed persons rather than as employees. From the point of view of the employer, such classification has the additional advantage of avoiding the need to pay employer’s NIC, sick pay and holiday pay and he need not provide for a pension or statutory redundancy payments. Nor is he prevented from easily dispensing with the person’s services by the employment regulations. Because of these perceived advantages in treating employees as if they are self-employed, many are classified as such with no consideration of the legal definitions of employment and self-employment. Where payments are made to self-employed persons, therefore, the status of these individuals will be considered carefully in the course of any Employer Compliance Review.
It is not often realised by employers that an over-generous reimbursement of expenses, which provides the employee with a profit element, will result in the building up of a substantial underpayment of tax and NIC. This is because the profit element is ‘pay’ for the purposes of the regulations, and PAYE should be applied to it. The practical problem frequently faced by the employer is the need to pay expenses at the ‘going rate’ to be able to retain his employees, and the ‘going rate’ often includes a profit element.
Returns by employers are made under the Income Tax (Pay As You Earn) Regulations 2003 and as such are not directly affected by self-assessment. However, the types of irregularities that arise and the way any tax lost is settled, mean that employer compliance review work is inextricably linked to other areas of compliance. HMRC are anxious to ensure that there is ‘effective liaison’ between employer compliance staff and those carrying out self-assessment enquiries.
There are increasing instances of teamworking and what HMRC call ‘whole caseworking’ where all aspects of compliance may be investigated at the same time. Notice of a review of all employer aspects may well be given in the formal notice opening the self-assessment enquiry.
The aims of the Employer Compliance Unit are to:-
From 6 April 2000, this list is extended to include employers’ obligation in relation to student loans and tax credits.
Tax offices are required to formulate an employer compliance plan and targets are agreed at national, regional and office level on a yearly basis. The plan is under the control of a Compliance Manager who has overall responsibility for the progress of working cases, and the Officer in Charge has overall responsibility for the conduct of employer compliance reviews undertaken by the office. The aim is to settle each case within six to 12 months (Employer Compliance Manual, ECM 3014).
The Board tries to deter investigators from taking up trivial cases by awarding quality points to reflect the weight and complexity of a case and the appropriateness of the work done. Minus points are given where there is evidence of bad practice by the investigator which justified a complaint from outside the department, whether or not such a complaint is made.