Employer Compliance Reviews

 

Employment income is chargeable on the earnings from any office or employment. Earnings are very widely defined to include:-

 

    • salaries, fees, wages;

 

    • gratuities, other profits or incidental benefits if they are money or money’s worth; and

 

    • anything that constitutes an emolument.

 

 

 

 

An employer compliance review will therefore be concerned primarily with:-

 

    • whether a person is correctly treated as self-employed or whether he is in fact an employee in respect of whom PAYE should have been operated;

 

    • whether expenses payments are no more than a reimbursement of allowable expenditure or whether they contain a profit element;

 

    • whether benefits provided by the employer are being correctly returned to HMRC and taxed accordingly;

 

    • whether incentives provided to employees by a third party are being identified and correctly dealt with; and

 

    • whether PAYE procedures are being correctly applied, particularly in the case of casual and part-time staff.

 

 

 

 

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.

 

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