It seems as if the last month or so, in particular, has witnessed HMRC issuing a barrage of different style 'nudge' and 'prompt' letters all designed in their own individual way to ensure that clients’ tax affairs are checked, double checked and in some cases certified to be correct by the signing of a separate Declaration.
In some cases, it might be difficult to see where HMRC is coming from in asking such questions outside the framework of a formal compliance check. Are they allowed to do this? Why are they doing this?
The change in tack however is most likely symptomatic of the fact that HMRC has learned a great deal from previous targeted campaigns. Much can be gained from casting out the net and watching to see the size of fish that voluntarily swim into it. This isn’t to say that HMRC are speculatively throwing out the bait either.
It is a well-accepted fact that HMRC now has at its disposal, sophisticated and technically reliant methods of risk assessment and it is highly likely that in most of these cases, they are guaranteed a satisfactory return on their catch. For the fish themselves, there is also much to be gained – the most prized being the chance of a significantly lower pecuniary penalty if they give themselves up for first refusal.
From letters addressed to 'Persons of Significant Control' where it is politely stated that, "this letter is not a compliance check into your Self-Assessment tax return. It’s just to help you make sure that your return is complete and correct,"; to the more forceful reminders to clients saying, "it is your responsibility to tell us about the UK tax you have to pay on offshore income or gains from anywhere in the world" and “[...] dishonestly making a false statement to evade paying tax is a criminal offence and (may lead) to investigation and prosecution," HMRC has most definitely not been resting on their laurels during the Covid-19 period.
But surely for all of this, and as important as these issues are, the main topic of conversation and area of interest at the moment has to be around the ever-changing landscape of furloughing claims. Just how far and into how many claims HMRC intends to enquire remains to be seen, but one thing is for sure, the questions they are asking now will be relevant not only this year, next year or the year after but far into the future.
How can this be? Surely once the Covid-19 situation is 'over', we can forget all about this and go back to how things were…can’t we? Well yes, to some extent that of course is the aim. After all, no employer wants to see a need for a long-term requirement of furloughing the workforce. But one thing that should not be overlooked is that HMRC has the advantage of being able to enquire into the tax affairs of a business both now and in the future.
Just because there will not necessarily have been a furloughing claim in the same year HMRC opens an employment compliance check, does not mean it won’t be on the agenda.
A standard type employment compliance enquiry will start off looking at the current or last 12 months but if any irregularities are uncovered, and these could well be very minor, it is open to HMRC to 'look-back' and presume that the same, similar or other errors would have been present in those earlier years. In most cases, this will be restricted to a 4-year look-back.
However, depending on the circumstances, this could be six years or in some extreme cases, 20 years. The retrospective nature of such enquiries would most certainly include questions around any furloughing claims if that year formed part of the look-back.
What can employers do now to protect themselves in the event of a future enquiry that may well not raise its head until 2026 in some cases?
First and most importantly, make sure that any claims that have so far been submitted are accurate. This means accurate in so far as the arithmetic of the sometimes extremely complex calculations are correct, but also to ensure that the principal of the furlough claim has been correctly based.
Secondly, keep as many contemporaneous records as possible supporting any claim made. Include timesheets if applicable with your PAYE records and make sure copies of any and all underlying calculations of furloughing claims are kept with them. Ensure that any and all verbal discussions and written correspondence with your staff notifying them of the fact they are to be furloughed are retained within your records together with copies of any legal and HR advice you may have sought at the time pertaining to employment contracts.
Keep a record of any other influencing factors that go beyond the obvious and support this with as much evidence as possible. You should compile a dossier of all factors affecting your decision to furlough staff now whilst events are unfolding.
In time, all this will become history but there is no better time to protect your business like the present.
The next step
If you have any questions or concerns surrounding tax compliance, please contact your usual UHY adviser or the UHY tax team.