HMRC enquiries – Preparation is 90% of the job!

28 January 2020

There can surely be few professional advisers who routinely deal with HMRC enquiries who, over the past five years or so, have not noticed the changing nature of H M Revenue & Customs (HMRC) intervention techniques.

This is becoming ever more evident in the field of “compliance checks”, where we have seen an integration of employment taxes, VAT, and national minimum wage enquiries being conducted, either at the same time under a joint enquiry with those departments or following shortly after each other, sometimes in what seems to be an endless succession of HMRC attention.

The start of such enquiries are often initiated by a request to complete Questionnaires, where HMRC will use the responses provided to assess whether or not further interrogation is required.

Alternatively, if they are satisfied on the risk areas concerned, they will be more likely to accelerate closure of an enquiry. More efficient analysis of replies by HMRC, following the receipt of the completed questionnaire, can now mean that clients who are prepared and have given well considered responses are not necessarily subjected to a long drawn out enquiry, which may have been the case in the past based on ‘old style’ PAYE visits.

Previously, HMRC officers often had to visit businesses with little or no advanced knowledge of what the business did, or an appreciation of their actual processes and procedures. Based on this, HMRC might have had to spend a day or more merely extracting such information from time consuming meetings with the business owner, even before they made a start on analysing any risk areas.

As experience shows, HMRC officers now have more awareness of the ‘right questions’ to ask first time around. We have seen the PAYE questionnaires change and develop over time from a fairly general, soft touch approach to a more finely honed, specific and in-depth questioning, the nature of which has expanded as the HMRC officer’s knowledge and experience into such enquiries has grown.

What are we seeing as topical and potentially higher risk areas?

A typical enquiry is now likely not only to focus on the generalities but to have a greater emphasis on drilling down into the finer details of the business’ operations and procedures. Common areas of focus and potential error can include:

  • Off payroll working and IR35
    A common topic in the press, this legislation is currently being reviewed prior to inception in April 2020, but is unlikely to significantly alter the fact that medium and large businesses will be responsible for determining employment status of their contractors operating via limited companies.
  • Employment allowance
    A common pitfall involves the fact that where there are associated businesses; there are different rules to be observed as to what allowance is available and how this is to be nominated/divided. The actual meaning of ‘association’ can be misunderstood, catching-out a significant number of businesses who unwittingly over-claim the allowance.
  • Compliance with national minimum wage legislation
    This legislation is fraught with difficulties, even where it is not obvious that a contravention has taken place. The clawback of training expenses when an employee leaves, for example, may mean that the employer has effectively underpaid in that particular pay period, thus triggering the non-compliance.
  • Apprenticeship levy
    Another area where, at first glance, businesses may be forgiven for thinking it isn’t applicable to them. However, if your business has a combined payroll cost of £3 million or more, this levy will apply. Once again, beware of associated companies whose payroll costs will be attributed to the overall threshold.

Each of these areas are potentially high risk for the unprepared business, and with more and more compliance responsibilities being placed on companies and the self-employed, the penalties charged where mistakes have been made are harsh.

The purpose of the message?

Be prepared! There can be no substitute for being aware and being prepared ahead of an HMRC inspection.

HMRC have access to an ever expanding network of information, and in addition to targeted risk assessments made possible by their software systems, they do still carry out a certain percentage of random enquiries.

The receipt of a compliance check notice falling on any business or company’s desk does not have to be a daunting affair.

If you are concerned at the prospect of a compliance intervention, we at UHY have the expertise and the experience required to help your business prepare for such an eventuality, and to undertake a risk review of any areas that may be a concern to you.

If you are faced with an actual enquiry or intervention, we can help you to manage whatever enquiry, investigation or intervention HMRC has initiated, assisting you to smoothly manage the process from start to finish and support you all the way.

Please contact your usual UHY lead partner or your local UHY specialist for any further advice or assistance.

Alternatively, fill out our contact form here.