Background

Employers can expect PAYE inspection visits every three to five years. The authority for these visits rests in Regulation 55 of the Income Tax (Employment) Regulations 1993, which requires the employer to produce records such as wages’ sheets, deduction working sheets etc. to any authorised officer of the Board.

Sources of enquiry

There are several units that may ask questions of an employer on his PAYE affairs. These include:

PAYE Audit

These units are attached to local collectors, and are designed to correct any errors that have occurred in the operation of PAYE and subcontractor operations, to collect any arrears of Tax and NIC (together with a penalty where appropriate) and to ensure that the employer knows how to operate the system correctly for the future. If the PAYE Auditor finds evidence of tax evasion on cash control or other maladministration he will notify the Inspector of Taxes so that a review of the business accounts may be considered. There are a number of specialist audit groups distributed throughout the county dealing with larger employers, such as public companies, public utilities, and public authorities. Specialist groups are also set up from time to time to deal with compliance problems in particular trades.

District Compliance Units

District Compliance Units are more concerned with the treatment of benefits and expenses payments, including expense allowances and incentives. If approached by the District Compliance Unit it is important to establish whether they propose to conduct a full review of all expenses and benefits, or whether a partial review is proposed. This would restrict the review either to certain benefits provided by an employer or of a review of all benefits provided to a certain category of employee.

Special Compliance Office

SCO will usually only be involved in a PAYE investigation where the tax at stake is very substantial and there is:

a) an overseas connection

b) an issue which affect the whole trade in a given area (possibly nation-wide)

c) the investigation crosses district boundaries

d) the work involved in the investigation makes it too big for a district audit group to handle it

e) negotiations are required with a third party (such as a trade union),

f) the issues involved are technically complex.

Areas of concern

There will be no such thing as a standard investigation, but there are many issues that are common to PAYE investigation work. Areas of common interest are:

a) payments to casual employees

b) allowances paid in respect of unsocial hours

c) overtime payments

d) incentive schemes

e) payments for additional duties

f) suggestion schemes

g) categorisation of employees as employed or self-employed

h) working rule agreements

i) additional payments such as lunches and laundry allowances.

a) expenses payments - including travel and subsistence payments, entertainment allowance, meal allowances, clothing allowances etc.

b) money or money’s worth - including gifts, Christmas hampers, long

c) all employee benefits - including vouchers, accommodation etc

d) directors and £8,500 employees benefits - including cars, loans, assets put at employees disposal etc.

e) failures of PAYE - including tips and casual payments

f) sub contractors scheme

g) employment status.

Penalties interest and settlement

Because the PAYE regulations impose specific obligations on employers, there are a range of penalties that can apply concerning failure to meet these obligations. The main penalty provisions are as follows:

Return forms P14 and P35

These end of year returns should be submitted by 19 May following the end of the year to which the return relates. Failure to make such a return produced an automatic fixed penalty of £100 for each 50 employees (or part of 50) for each month the return is late.

This automatic penalty applies to the first 12 months of failure to make a return. A further penalty may be sought by the Inland Revenue for failures continuing over 12 months, with a maximum penalty being the full amount of the tax remaining unpaid at 20 April after the end of the year to which the return relates.

No penalty will be chargeable if the employer had a reasonable excuse for the failure. It should be noted that the same rules apply to National Insurance deductions collected with the PAYE Tax and also to deductions under the subcontractors’ schemes.

Where return forms P14 and P35 contain errors there is a maximum penalty of 100% of the tax underpaid as a result of the employers fraud or neglect. The maximum amount is the difference the amount payable for the year of assessment and the amount that would have been payable if the return had been accepted as correct. Again National Insurance deductions and subcontractors payments are also caught by these rules.

Returns Forms P11D/P9D

Failure to submit these forms will leave the employer open to penalty proceedings. The maximum penalty is £300 together with a continuing daily penalty of up to £60 per day for continued failure. The initial penalty is awarded by the Commissioners, although the continuing daily penalty can now be determined by the Inspector. The reasonable excuse defence is still available to the employer.

Incorrect returns sent to the Revenue are subject to a maximum penalty of £3,000 per offence, effectively being £3,000 per form.

Interest is chargeable at the official rate on any tax unpaid within 14 days after the year of assessment.

Rather than taking formal proceedings to recover tax interest and penalties it is far more likely that the irregularities will be finalised by way of offering a settlement. It is likely that this will cover a number of years (a maximum of 6 years in all but the most serious cases) and will bring in liabilities of both Tax and National Insurance.

Conclusion

PAYE settlements can produce a substantial burden on employers. As with all Inland Revenue Investigation work it is likely to be the medium sized firms that are targeting to produce additional yield for the exchequer. The professional advisers should be aware of the range of queries that can arise from such an investigation and be able to advise their clients the best way of minimising their monetary exposure.