HMRC collects additional £737m as crackdown on payroll tax errors continues

This publication was covered in BBC Radio Scotland, City AM and i on 16 May 2016 and Accountancy, Accountancy Age and economia on 17 May 2016.
  • SMEs paying disproportionately high levels in additional taxes (51%)
  • Figures suggest Government’s overly complex tax system is tripping SMEs up and needs to be simplified

According to our research, HMRC has collected an additional £737.3m from investigations into companies over tax avoidance and errors relating to employer compliance – with small businesses, in particular, coming under fire.

SMEs have been hit particularly hard by the crackdown on payroll tax mistakes, accounting for over half (£373.4m) of the additional sums collected – despite being responsible for only 11% (£96bn) of total UK payroll.

Making up 89% of payroll (£726bn), larger businesses paid the comparatively low figure of £363.9m in additional payroll taxes and penalties.

SMEs are bearing the brunt of HMRC’s increased tax investigations work because SMEs are more likely to take on casual labour, run flexible workforces or operate as umbrella companies – often making it difficult to determine to which payroll tax bracket their labour force might belong.

Our research shows that another reason for errors is that SMEs are also less likely to seek expensive advice on tax issues, meaning they stand at higher risk of making mistakes when it comes to filing complicated employer compliance tax returns.

The figures are symptomatic of the UK’s overly complex employer compliance tax system – adding that Government needs to take steps to address these issues in order to help SMEs avoid tripping up in the future.

Roy Maugham, tax partner, says: “SMEs are being chased for a totally disproportionate amount of underpaid payroll tax, compared to their larger counterparts. But much of the underpaid tax is due to genuine errors. This strongly suggests the Government needs to simplify its systems to help SME avoid mistakes.”

“While SMEs will be reluctant or unable to pay for expert advice, they are clearly struggling to navigate the tax system as it stands.”

Umbrella companies – which employ outsourced personnel on a fixed-term basis, offering a cheaper alternative for SMEs to employing full-time staff – have been a particular problem for SMEs when it comes to payroll tax.

Roy Maugham, says: “Those employing flexible workforces or operating as umbrella companies, for example, might find it difficult to determine which ‘box’ their labour force falls into when it comes to paying tax.”

“With HMRC honing its ability to spot inconsistencies in tax returns across the board, small clues – such as when a supposedly outsourced employee is offered annual leave by a company – will trigger an investigation.”

“Investigations can be extremely disruptive to SMEs – as well as expensive. While some may be actively looking to avoid paying tax, in their vast majority, SMEs will simply be tripping up on a complex tax system.”