A practical overview of how to deal with PAYE and CIS inspections by HMRC.
This article was first published in the Globe Law and Business magazine HMRC Enquiries, Investigations and Powers, June 2017.
HMRC conduct many types of enquiries/investigations into individuals and businesses, and this article seeks to outline an often common type of enquiry; a review/inspection of a business’s obligations under PAYE and the construction industry scheme (CIS).
Usually, HMRC will initially call a business asking the owner/director for a mutually convenient time to meet up in order to discuss the workings of the business and what records are held in respect of PAYE and, where appropriate, CIS. This is then followed up by a letter requesting certain documents are available for review. If the company is part of a group of companies, then it is likely that a pre-review questionnaire is enclosed with the letter and a request made by the HMRC officer for the questionnaire to be completed prior to any visit being made.
The legislation underpinning HMRC’s request to meet and inspect the businesses records is contained within FA 2008, Schedule 36. The same legislation is also used where unannounced visits are made to businesses to conduct record inspections. These types of visits are rare, and are only undertaken where HMRC suspect that if a visit was announced certain records would be destroyed or certain individuals would not be available.
The day of the Inspection
The officers (it is likely that there will be a minimum of two) will arrive (often previously arranged for mid-morning) and ask to see the business owner. The officers will normally ask the business owner to describe the workings of the business. This will include details surrounding the hours and days of trading, the number of staff the business employs, whether the business engages self-employed individuals and, if the business is in the construction sector, how many subcontractors the business uses.
The officers will also ascertain who within the business is responsible for operating the payroll, dealing with expenses and benefits, and for paying self-employed individuals and subcontractors which fall within the CIS.
The officers will also take this opportunity to have a look at any literature that is lying about which would help them with the inspection (e.g. internal publications or memos about the business which may show or comment on recent staff entertaining or cash rewards for top salespeople). It is, therefore, advisable to undertake a review of the parts of the building which the officers may have access to, to ensure nothing can be picked up by the officers in the course of their visit.
The officers will then conduct a series of interviews with the appropriate individual within the business to ascertain further information.
It should be borne in mind that on occasions a PAYE/CIS inspection is used as a ‘stalking horse’ for a possible future corporation tax enquiry. Therefore, it is not a simple case of answering the officer’s question; readers faced with these circumstances should always think before answering a question, and if the question is not relevant to the Inspection, should politely decline to answer.
Once the officers have obtained the answers to their questions, they will wish to inspect the records. The specific records will vary from business to business, but the officers will usually wish to see payroll records (and how gross pay is made up e.g. hourly rate/number of hours worked/bonus payment, etc.), a sample of expense claim forms with backing documents and contracts for services for self-employed individuals. For construction companies, HMRC will also want to review whether the subcontractors are genuinely self-employed and, if they are, whether the correct payment status is being operated on them.
It should not be overlooked that, as part of their payroll checks, the HMRC officers will wish to consider whether National Insurance contributions (NICs) have been calculated properly. This check will be by reference to pay periods, but note that special rules apply to directors; their NICs are calculated by an annual pay period, irrespective of when they get paid.
HMRC will usually inspect the records on site, but occasionally they will ask whether they could take some records away to review back in the office. It is best practice to ask for copies of records which are taken away, together with a list which is signed by the HMRC officers detailing the records which have been taken away.
Once the officers have reviewed the records, it may be appropriate to ask some further supplementary questions. These are normally sent to the business in a letter. The questions may seek clarification or may request further information/documentation. If no issues arise, the review will be closed and the officers will return any records they have taken away.
However, if the officers ascertain there is an issue which gives rise to additional PAYE/NIC/CIS tax liabilities, then they will issue computations to the business. The computations are not formal at this stage, and an open dialogue can be entered into between the business and HMRC.
The likely issues which will require considering are the number of years HMRC have included in their computations and whether they have used actual figures or whether the figures have been extrapolated using some sort of methodology. In addition, it is worth checking to see whether the correct tax and NIC rates have been used.
In relation to time limits for tax, HMRC utilises the categories of behaviour to identify how many years are involved. The standard time limit is four years; for cases of carelessness and deliberate behaviour, the time limits are six years and 20 years respectively. The time limits for NICs are not aligned with those for tax and follow the general statute of Limitation Act. This provides that only six years can be considered (unless deliberate behaviour is in point, which results in 20 years falling due). However, it is intended that, from April 2018, NICs will be removed from the effects of the Limitation Act 1980 (and Northern Ireland equivalent).
It is often the case that HMRC will only sample certain records and then, using the principle of the ‘presumption of continuity’, will extrapolate the figures reducing the amount on a year by year basis using the retail prices index. On occasions, this gives a misleading picture of the amount of unpaid duties. It may be the case that in certain years, the issue doesn’t arise at all, or if it does the figure is widely inflated. It is certainly worthwhile checking the figures involved to clarify if HMRC are seeking additional tax where none or a minimal amount is due.
Once final figures have been agreed, HMRC will look to agree a negotiated settlement to conclude matters. This will seek to include interest and a possible penalty. Similar to time limits, penalties are based on the category of behaviour. If the duties arise through the business taking due care, then no penalties are due. However, if the duties arise through carelessness then a penalty (prompted) of 15% to 30% of the duties would be due. However, it is possible to agree to suspend the penalties, subject to conditions being able to be put in place. For completeness, if the issue arises due to deliberate conduct then penalties of 25% to 100% of the duties could be sought.
Shortly after all the settlement figures have been agreed (tax, NICs, CIS, interest and penalties) HMRC will issue a letter of offer to be completed by the business. This will also give payment terms; usually, payment is due 30 days from the letter accepting the offer. However, it is possible to agree on a payment plan where the debt is substantial.
Once the letter of offer has been submitted, a letter of acceptance is issued by HMRC, which concludes the inspection.
Whilst these types of enquiry seem straightforward (and many often are), they can be quite intrusive and take several months (some often a few years) to conclude. It may be appropriate on larger cases to undertake a PAYE/NIC/CIS health check every once in a while, to ascertain if any significant risk areas arise. In these instances, readers may wish to contact an independent specialist to undertake this type of work to ensure clients are not storing up problems for themselves.