Introduction

How does HMRC decide who gets a visit?

Although employers can be selected at random, it’s important to be aware that HMRC has for some years operated on a risk assessment basis of selection, which means that its centralised Risk and Intelligence Service will have supplied information to the local employer compliance officer. They can suggest that there are potential problems and that a monetary settlement is likely to be sought from a company. But HMRC does get it wrong, and the better prepared employers are, the better chance they will have of defending the business.

What is the purpose of an employer compliance review ?

HMRC carries out employer compliance reviews to ensure that employers and contactors are meeting their obligations in relation to PAYE and NI contributions. Checks are specifically made to ensure:

• that PAYE and NI are being operated correctly
• the employer is complying with the obligations imposed by real time information (RTI)
• the status of workers is correct
• that expenses and benefits are being treated correctly
• the correct operation of statutory payments
• that the employment allowance has been claimed correctly
• where relevant, that the Construction Industry Scheme (CIS) is being operated correctly; and
• that adequate records are being maintained.

HMRC also uses these to educate employers to help minimise the likelihood of future errors.

Employer compliance reviews are rarely a priority or come high on the agenda for any business, until HMRC gives notice of an impending inspection visit.

The potential impact and the likely cost of such a visit both in terms of management time and settlement costs should be part of at least an annual review of compliance procedures. Someone should be asking questions to establish “is our house in order?”

The review itself

Who will carry out the review?

The employer review will be carried out by an HMRC compliance officer. It operates a number of teams to deal with different aspects of tax compliance.

The Large Business Service deals with bigger businesses, employers and partnerships and such a business will probably have been allocated a Client (or Customer) Relationship Manager (CRM), who will oversee all HMRC involvement with the business, including employer issues, VAT and corporation tax. CRMs will meet with the business managers and discuss potential risk areas, offering advice, risk reviews and even access to HMRC specialists. Hopefully, it will mean that large businesses have a point of contact that will enable them to resolve problems more quickly and perhaps it may offer more consistency. It should result in low-risk businesses enjoying a “lighter touch” and less HMRC attention, whilst high risk ones will receive significantly more.

What do businesses need to provide the compliance officer with?

At the outset, it’s important to ensure that the HMRC officers are provided with the records that they have requested and are entitled to see. Drowning them in unnecessary paperwork is not a good idea and is certainly not time and cost effective. Also at this stage it needs to be recognised that the officers may wish to copy and take away some extracts of the records, which they are authorised to do. It’s good practice to agree at the start who will do the photocopying and ensure that two copies of everything to be taken away will be made. This makes life much easier when questions are raised later in correspondence, often weeks or even months later.

What are HMRC’s aims and objectives for the audit?

HMRC carries out reviews of employers’ and contractors’ records to establish if they are meeting their statutory obligations, including deducting and paying over the correct amount of duties and submitting their statutory returns, accurately and within the specified time limits.

What employer returns will they review?

Under RTI, employers must submit an FPS on or before the time that a payment is made to an employee. Employers must also notify HMRC when making the final submission of the tax year that it is the last submission. Where there are no payments to an employee in a tax month, they must submit an EPS instead.

Where benefits and expenses have not been payrolled, employers are obliged to complete and submit Forms P11D (Return of Expense Payments and Benefits in Kind). Regardless of whether or not benefits are payrolled or notified on Form P11D, the P11D(b) (Return of Class 1A NI) must filed. Both forms must reach HMRC by the statutory deadline of 6 July after the end of the tax year. The Class 1A NI liability that arises. must be paid by the statutory deadline of 22 July where payment is made electronically (or by 19 July where payment is made by cheque).

A later deadline applies where payment is made electronically. Employers can view HMRC’s guidance on making payments of PAYE etc. at http://www.hmrc.gov.uk/payinghmrc/paye.htm.

Are there separate forms for the construction industry?

Contractors in the construction industry must submit monthly CIS300 returns and face severe penalties and probable loss of gross payment status as a subcontractor if this isn’t done accurately and on time.

What are HMRC compliance officers aiming to achieve?

HMRC’s stated objectives in carrying out these reviews are to:

• ensure that all remuneration and rewards given to directors and other employees are dealt with correctly for both tax and NI purposes
• establish the extent of any irregularities and the degree to which the employer is to blame for these
• collect any amounts of tax and NI underpaid, together with interest and penalties where appropriate
• allocate NI to individual contributors’ accounts; this is important to preserve individuals’ rights to state benefits, e.g. retirement pension
• educate the employer for the future wherever possible; and
• improve “customer” experience by providing a consistent, efficient and comprehensive service.

How long will all this take?

HMRC’s guidance indicates that a full review will require at least one visit to the employer in order to question those responsible for the business, and examine appropriate records. For minor issues, the HMRC officer may deal with the matter over the phone and/or by correspondence, instead of through an arranged visit to the premises.

A recent example of this was where HMRC wrote a letter to an employer as a “notification of a review of your records”. The enquiry was restricted to one specific issue and the officer said that it would be dealt with by correspondence. The employer had to complete an explanation sheet after seeking advice from an advisor, so it avoided the necessity for an inspection visit.

How will employers be notified of an inspection visit?

Inspection visits are normally arranged by the issue of a standard letter, although sometimes an HMRC officer will phone first to arrange the date, place and time of the visit. There’s nothing sinister about the advance phone call, but even at this stage someone of appropriate authority should deal with the matter and a record should be made of the call. The HMRC officer should follow this up with a letter to confirm the arrangements for the inspection visit.

What should employers do if HMRC arrives unannounced?

Employers should be very cautious if an HMRC officer turns up without giving any advance warning, because that would be unusual and normally only happens where HMRC has evidence of “serious non-compliance”, although, of course, its information could be wrong. Nevertheless, employers should be on their guard. Such unannounced visits must be approved in advance within HMRC’s internal procedures. This will be done by an authorised officer who will be of a senior grade; again, demonstrating the seriousness of the issue. HMRC guidance recognises unannounced visits are an intrusion and may be inconvenient to the employer, but it won’t stop an officer if they believe there’s a serious risk of tax loss if they give advance warning of their visit.

If an HMRC officer arrives to carry out an inspection without giving advance warning, employers should ask the officer to come back at a more convenient time, but seek immediate professional advice from their accountant or tax advisor.

What guidance will HMRC offer?

HMRC publishes a range of factsheets. Compliance check factsheet CC/FS1a contains general information. Employers can view and download the full list of factsheets from here.

What should employers do if the date of the visit doesn’t suit them?

HMRC accepts that businesses might require several possible dates to fit in with their commercial activities. Perhaps, for instance, the payroll manager only works on certain days.

If the suggested date is not convenient and employers want to arrange an alternative, they shouldn’t leave it until the last minute - HMRC officers also have other commitments. However, making other arrangements for a good reason and in good time shouldn’t be a problem.

Early contact with the HMRC officer is also advisable to avoid misunderstandings and wasted time, if only to confirm that the inspection is to the correct business. Where a business is part of a larger group, check that the local compliance officer will not cancel the inspection and refer the matter to the Large Business Service (Employer Compliance) if the records are held in different parts of the country.

Where will the inspection take place?

HMRC must be told if the review is to take place somewhere other than at the business address. For smaller businesses, this might perhaps be at the accountant’s office. It can be very embarrassing and not the best to start to a relationship with HMRC if the officer turns up at the

Employers can suggest, and HMRC should agree, that a visit can take place at any convenient location where the records can be made available to the officers. If agreement can’t be reached, which would be unusual, the officer can require that the records are produced at the place where they are normally kept, or at the main place of business in the UK.

Our advice is to arrange the inspection at the best location to ensure that the required records can be easily viewed and copied as necessary, with the minimum fuss and in the least amount of time. The HMRC officers should be given adequate space to work in a reasonably comfortable environment to facilitate a good working and business-like relationship. A cup of tea or coffee would not go amiss, but don’t overdo the hospitality and perhaps put the officers in an embarrassing position.

Should the accountant attend?

Where employers have an authorised agent, i.e. accountant or tax advisor, they should also have been notified of the impending visit by HMRC and they may offer some assistance if they have the necessary expertise in the field. The issue of outside involvement is always a thorny one, as businesses are often concerned that this will signal a potential problem to HMRC.

HMRC recognises that some businesses will want to be professionally represented. This is unlikely to prejudice its view of a business. It would be sensible to at least talk through the dos and don’ts with the professional advisor.

Small businesses. The decision on whether to use a professional advisor or not is often a difficult one, especially for smaller businesses. Unless the employer is really unsure of its ground, or the accountant does much of the PAYE work, the employer is unlikely to need them on hand. However, they may find the presence of the accountant reassuring.

Larger businesses. Conversely, many medium to large-sized businesses require the assistance of an expert to hold their hand and ease their burden, minimising the amount of time expended and, hopefully, the length of the inspection.

Cost v expertise. One issue is the cost benefit; is it worth the cost or is it cheaper to pay HMRC, even if it ends up being more than the settlement that would be achieved by a specialist. For many, the concern is that the presence of a professional advisor will give a signal to the HMRC officer that there’s something wrong. It would be easy to give examples of the disasters that occurred because of the lack of professional representation; however, more often than not, little or nothing will go wrong.

Final word of warning. Although HMRC accepts that some businesses will be professionally represented, responsibility for supplying the information requested and ensuring the accuracy of that information remains with employers, even where they have advised a professional advisor or staff to deal with HMRC on their behalf.

How many members of HMRC will attend?

Usually, HMRC employer compliance officers “hunt in pairs” and this is more likely where the inspection takes place, say, at the director's home, where the business records are kept, or at the home of a worker being interviewed, perhaps as part of an employment status enquiry.

For larger businesses, a Large Business Service (Employer Compliance) inspection team might comprise more than two officers, depending on the size of the business and the issues involved. The lead officer will normally have two assistants and the team might also include a payroll or employment status specialist, or a construction industry specialist where the business is registered to operate the Construction Industry Scheme.

Who should attend from the business?

This will again be dependent on the size of the business being inspected.

Small businesses. For many smaller businesses, the inspection will take place at the office of the accountants and there may be nobody from the business in attendance. HMRC may sometimes request the presence of one or more of the directors, in which case the advisor will want to establish why and what issues are to be discussed with them. Agendas for the inspection visit are not often provided or normally sought for employer compliance inspections, but if employers have concerns about requests for information or for certain individuals to attend, they can ask the HMRC officer to provide an agenda and details of any specific matters to be discussed.

If employers want an agenda and details of any specific issues to be discussed, they should write to the HMRC officer to ensure that the inspection visit runs smoothly; pointing to the need to avoid delays in finding information on the day.

Larger businesses. In medium-sized and larger businesses, HMRC officers may want to interview the personnel responsible for specific matters, perhaps the payroll supervisor or manager, HR director, fleet manager or the staff member responsible for accounts payable and the payment of expenses and petty cash. This is part of the new approach to reducing records examination and concentrating on procedures and systems and shouldn’t be a matter of any great concern.

All businesses. There needs to be properly prepared briefings for these staff, some of whom may never have experienced such an event and might be very nervous about having to face what they might perceive as an interrogation. They should have their responsibilities properly explained and have the opportunity to ask any questions about matters that might concern them and be briefed on how to deal with any difficulties that arise. If a professional advisor is not present, these employees should be accompanied during the interview to give them comfort and to allow notes to be taken.

One of the golden rules that employees need to be made aware of is that “when in doubt, say nowt!” Their response should be “I will need to check that and come back to you”, rather than blurt out something that may be wrong.

It’s also advisable for the employees who are interviewed to be de-briefed afterwards, to ensure that everyone is clear about what was discussed and what issues are likely to be the subject of any follow up.

How long will the inspection take?

It’s not possible to say how long a review will take; it will depend on the size of the organisation and the number of records. Having all the relevant records available for the visit and ensuring that everyone is available and ready will minimise the time the officers have to spend on site.

Employers should only provide the specific information that is requested. They should not fall into the trap of providing everything.

The inspection visit should normally last just a few hours for a small employer or contractor to anything up to a few weeks for a large employer. However, most inspections last between half a day and two days, and return visits are the exception, tending only to happen when the preparation has been inadequate or something occurs that could not be foreseen.

Preparation is everything, establishing exactly what records are to be made available and briefing appropriate staff on how to handle the inspection, including who will deal with what specific issues.

Will there be an opening meeting?

Small businesses. Usually, there’ll be no need for the compliance officers to have a briefing first. So, apart from the usual opening pleasantries, employers can point them in the direction of the records and let them get on with it, but see “All businesses” below.

Larger employers. A Large Business Service (Employer Compliance) inspection will normally involve a pre-inspection meeting to discuss the business, what records are available, where they are kept and which offices are to be visited, if the employer has more than one at which payroll etc. records are kept. Typically, if there is more than one PAYE and/or contractor reference and the records are kept in separate places, the officers will visit those that have payroll and/or subcontractor records, or a sample of the branch or subsidiary records if there are many of them. This first meeting will be followed up in writing, confirming the arrangements for the on-site inspection.

All businesses. In most cases the inspection visit will begin with the completion of an HMRC questionnaire. The review will start with a discussion of the nature of the business, the size of the workforce, the record-keeping system and who completes the records of payments and deductions for directors’ and employees’ wages and salaries. A review of expenses payments and benefits provided will also be undertaken on an employer compliance review.

If employers know there’s a problem should they say anything?

At this stage, the business may wish to make a voluntary disclosure of any known irregularities that it’s aware of. This is to demonstrate the willingness to be a compliant employer and with a view to reducing any penalties that might arise. The need for a voluntary disclosure might come out of an in-house or external pre-inspection review of the relevant risk areas, which is another cost benefit issue to be considered when the forthcoming inspection letter is received.

Should staff be in permanent attendance?

The initial discussion over, the HMRC officers will then want to review the relevant business records. It’s not necessary for anyone to be present throughout this time, but someone should be available, perhaps at the end of a telephone, to answer any queries and provide any additional records requested. Ideally, the officers should be given a room with all the facilities they need. However, on confidentiality grounds, they should have limited access to other staff and not be given freedom to come and go and take any business records they see in the cupboards.

How far will HMRC look back?

The review will normally focus on the current year initially. PAYE regulations require employers to keep records for three years plus the current tax year. But in the opening letter, or follow-up letter if arrangements are made on the phone, HMRC will normally specify a shorter period. This sample period may be for one to three months or for twelve months if it is a smaller business. If the inspection is carried out in conjunction with a review of the business’s affairs, the records may match the accounting period under review.

What electronic data will HMRC check?

As most records, and certainly virtually all payrolls, are maintained electronically, the compliance officers may ask employers to provide a copy of the payroll records so that they can be examined and tested back at the office by a payroll specialist who will not need to attend the inspection. If they are unable to provide this or the payroll is outsourced and the cost is prohibitive, HMRC will accept that the paper records have to be examined and this should not have a negative effect on the inspection.

Compliance check factsheet CC/FS22 explains the position on providing HMRC with access to electronic records. The factsheet is available to view here.

During the examination of the business records, someone needs to be contactable to deal with any queries that might arise. If there’s no professional advisor present to do this, it needs to be someone senior enough to take control and to ask the officers to explain what they are doing and why they are asking questions, if any concerns arise.

Anything else employers should know about before the officers leave?

It’s normal and “best practice” to have a debriefing with the HMRC officers at the end of the review of records, or at the end of each day if the inspection takes longer than one day. This is important to clear up any misunderstandings and allow more time to respond to any queries that might be raised.

The fewer open points that exist when the officers return to their office, the easier it will be to finalise the inspection review and reach an agreement on any settlement.

It’s important to agree what happens next and the HMRC officers should be asked to detail any open points in writing; or to confirm that the enquiries are complete. Notes of the meeting are normally provided, unless there are no irregularities or any that arose are minor and/or relate to the current (open) year. If the officers think that there are any irregularities which give rise to penalties, they will normally issue the factsheet CC/FS7a Penalties for inaccuracies in returns or documents.

What happens after they’ve left?

Whatever was said or not said, it isn’t a case of shutting the door, shouting hurrah or sighing with relief, and then waiting for that brown envelope to drop through the letterbox. Whether or not there was any debriefing with HMRC, there should be an early meeting of the employees and directors involved to review what happened and agree what, if any, action should be taken. Employers may need to:

Appoint a co-ordinator. Someone should be designated to collate everyone’s notes of the issues that were raised by the HMRC officers. Identify any uncleared points and any action points that were agreed, particularly if any further information was promised and has to be sent to HMRC. Review what information was taken away, making use of the copies taken.

Take account of other information. Consider whether any information has to be obtained from third parties, such as the garage or car leasing company if there are issues about list prices or the value of cars transferred to a director or employee. This should be done without delay as employers will not be able to control the timescale for their response and give clear instructions on what further information is needed. It’s important to avoid any excessive delay, which might have an adverse effect on the reduction of any statutory penalties to be included in the settlement.

Provide progress reports. The HMRC officer should be kept informed of any likely delays and the reasons for them, because this approach is much more positive than silence or merely responding to reminders.

Pay on account. If there’s been any interest-bearing income tax liability established, such as a failure to operate PAYE or deduct Class 1 NI on payments to a cleaner or Class 1A NI on an understated car or fuel benefit, then employers can consider making a payment on account to stop that interest charge running. The HMRC officer(s) will see this as a sign of co-operation, which will also help with any later arguments about the mitigation of penalties.

Adjust for benefits in kind. If any irregularities relate to benefits in kind, such as the omission or understatement of particular benefits, employers should establish if any further information is needed to more accurately calculate the amount of the liability. They may need to ask employees to look at their diaries or the activity sheets of the sales staff, to provide more information on business mileage and places visited.

Adjust subsequent periods. Consider what has been agreed in terms of correcting any minor errors where no recovery was to be sought. Are any open (current) year adjustments required? There should be no delay in putting these right as they may be checked on the next inspection and settlement required with a greater penalty. There would certainly be no chance of escaping a penalty under the “reasonable care” argument. And the lack of attention to such points might also be viewed as a serious failure!

Set up a PAYE settlement agreement. Consider whether there’s a necessity to amend the existing PAYE settlement agreement (PSA), or to set up a PSA to deal with any taxable expense payments or benefits in kind that have been picked up on the inspection and will continue to be paid or provided. This is a way of dealing with such liabilities in the future and will lessen the likelihood of an inspection visit in the future and certainly of there being any significant settlement in terms of untaxed and unreported liabilities.

And finally. At this point is there anything else that can be learned from the experience of the HMRC inspection that requires action now? Are changes needed to the company expenses policy or does the employer need to introduce an expenses policy and/or guidance for directors and employees on issues such as the claiming of staff and business entertaining and the differing tax treatments? There might be a need to replace round sum expense claims with those for receipted expenses, or to tighten up on the provision of receipts to support business expense claims.

Settling up

What might be expected from HMRC?

If the employer compliance review has revealed discrepancies, HMRC will seek to recover the lost PAYE and NI contributions, together with penalties and interest. The next step on the road to settlement should be when the HMRC letter arrives, accompanied perhaps by pages and pages of computations of the income tax, Class 1 and 1A NI liabilities. Employers will have to consider these computations and what liabilities arise, before quantifying the amounts and agreeing who has to pay, i.e. the employer or the employee. The computations will need careful consideration and should not be readily accepted as accurate or correct, simply because of where they come from. The assumptions that were made by the HMRC officers, and there may have been many, will need to be thoroughly tested.

What should employers be looking out for?

HMRC will have used a sample period, which is often taken as the last closed income tax year, and that sample period may not be truly representative of the actual liabilities over the whole period of the settlement. If the irregularities are significant, perhaps as low as £500, HMRC will normally seek a settlement for the previous six closed tax years, based on projecting back the latest figures and probably making adjustments using the Retail Price Index.

How can employers counter such arguments?

Ask how big the business was six years ago and how many employees it had then and in the intervening years. Who would have been claiming the taxable expenses or benefits for which liability is now being sought? What was the modus operandi then and were the untaxed payments, expenses, petty cash, benefits etc. paid every year and at the same level? These and any other issues need to be considered carefully and it may be possible to provide information that can significantly reduce the proposed settlement.

Employers shouldn’t hesitate to ask for an explanation of the figures if the HMRC computations do not make sense or are not fully understood. It is obliged to provide a full explanation if requested; it won’t affect the level of any penalty.

Who is liable for the bill?

The circumstances in which the employer can recover PAYE tax and NI from the employee are limited. Under the PAYE Regulations, an employer can only transfer liability to the employee if HMRC is satisfied that the employer took reasonable care to comply with the PAYE Regulations and the failure to deduct the correct amount was made in good faith, or the employee received the payment in the knowledge that the employer had wilfully failed to deduct the correct amount of tax.

Where these conditions are not met, the employer will be liable to pay the bill. It must be emphasised that there is no legal right of recovery from the employer for the employee’s personal income tax liability.

Should employers agree to settle an employee’s tax?

Although it may sometimes be cheaper to pay the penalties instead of the grossed up income tax liability, most employers do tend to agree to pay the tax and this is probably because of the potentially negative effect on staff morale. HMRC may take action against the employees to recover the unpaid tax, which would clearly not be well received.

One factor in favour of the employer settling the employees’ liability is that HMRC will not charge any interest on the late paid income tax etc. If the settlement goes back over a few years, this can be a considerable saving.

What if the company can’t pay?

It’s HMRC policy to seek a settlement from the directors where there are omissions or understatements of expenses payments and benefits in kind. Although this does not always happen, it’s more likely to occur in smaller companies where the directors are often the owners of the business. There’s no right or wrong way to address the question of whether a director should readily accept such a request from HMRC. There are special regulations that HMRC can invoke that will make the director personally liable. But they are complex and difficult for HMRC to apply.

This provides the director with a negotiation point as far as penalties are concerned. It’s a judgement call for the director as every case will be different. If in doubt, and the amounts involved are significant, an expert should be consulted.

What are the steps to negotiating a settlement?

Stage 1 of the negotiations is the agreement of the irregularities and the qualification of any liabilities, including interest chargeable on the unpaid duties. Interest will be calculated from the due date to the actual date of payment. The interest calculations will normally be based on a forward date of two to six weeks ahead to allow time to reach agreement, unless a payment on account was made earlier to stop interest running.

Stage 2 is the agreement of a settlement offer to include an addition for penalties, but only for that part of the settlement that is culpable and liable to penalties. As indicated above, the income tax liability on benefits in kind rests with the director or employee, not the employer, but penalties of up to £3,000 will be chargeable for any incorrect P11D returns. Penalties will arise on any failure to operate PAYE and deduct Class 1 NI (on earnings), Class 1A NI (benefits in kind) and Class 1B NI (shortfall in a PAYE Settlement Agreement) and on any CIS deductions.

What are the factors affecting the level of penalty?

The maximum penalty chargeable is 100% of the income tax, NI and CIS tax underpaid by the contractor/employer, but this is subject to mitigation in accordance with fairly strict guidelines given to HMRC officers. Once it becomes apparent that penalties might be charged, the factsheet CC/FS7a Penalties for inaccuracies in returns or documents should be given out.

If CC/FS7a was not previously issued, this should be pointed out to the officers now. The employer could argue that more effort could have been made to respond more speedily to enquiries had it been realised that this could affect the level of penalty charged.

Starting with a base of 100% of the underpaid duties, the maximum penalty will be reduced to take into account three factors:

• disclosure of irregularities (up to 30%)
• co-operation throughout the review (up to 40%)
• seriousness of the offence (up to 40%).

Will it help if employers admit to an error?

The full 30% would only be given if HMRC was approached before announcing the intention to visit. 20% should be given if full disclosure is made at the start, but this would be reduced if the disclosure was only partial.

What guidelines will the compliance officer be working to?

HMRC guidance to staff contained in its Compliance Handbook indicates that the starting point of the penalty is the calculation of the potential lost revenue (PLR). The penalty is a percentage of the PLR, depending on whether the behaviour that gave rise to the PLR was careless, deliberate but not concealed or deliberate. The maximum penalties for each type of offence may be reduced for the quality of disclosure.

Guidance on the reductions that can be given for the quality of disclosure can be found in HMRC’s Compliance Handbook at CH82400. Unprompted disclosures will earn a greater reduction than those which are only made after much prompting by HMRC staff. The reduction for disclosure cannot reduce the percentage below the minimum for the behaviour resulting in the PLR. In determining any reduction for disclosure, HMRC officers will consider the timing, nature and extent of the disclosure (CH82431). HMRC publishes examples of the level of reduction that may be given in particular circumstances at CH82432.

What factors should employers mention to HMRC?

As the penalties are behaviour-based, it is advisable to take reasonable care and to come clean as soon as employers realise that an error has been made. Any attempt to cover up mistakes will be paid for in terms of higher penalties.

Penalties may be reduced to reflect the quality of any disclosures made. Maximum reduction is made for making unprompted disclosures in a timely fashion - it is therefore better to come clean as soon as it is realised that mistakes have been made, rather than brushing it under the table and waiting for HMRC to find out.

What impact does behaviour have?

The inaccuracy regime outlined above is behaviour-driven. The advantage is that penalties are not charged if  the employer can demonstrate that it took reasonable care.

In its Compliance Manual at CH81130, HMRC lists examples of what it regards as having taken reasonable care - this includes taking advice from HMRC which later proves to be wrong, acting on the advice of a competent advisor when all the relevant facts have been provided and using information from another person where it was not possible to check its accuracy. HMRC will also take account of the systems that are in place to prevent errors occurring, and a penalty will not generally be charged if there are good internal controls and systems that could reasonably be expected to produce the right results.

In negotiating with HMRC, where possible, employers should seek to provide examples to demonstrate that reasonable care was taken. It is also prudent to review systems to ensure good controls exist both to prevent errors and to ensure any errors are spotted quickly so they can be corrected.

The percentage of PLR charged as a penalty reflects behaviour - with the highest penalties being charged for deliberate errors that are concealed from HMRC.

What is the procedure for agreeing a settlement?

It’s probable that a settlement meeting will be held, but this is not always needed. But it is necessary that a formal offer is made in writing and accepted by HMRC. Most offers are dealt with by the employer compliance officer or caseworker under supervision of a manager, but some have to be submitted to the authorising officer, for consideration higher up the chain of command. Employerscan therefore expect some delay in hearing back from HMRC. But they shouldn’t read too much into this.

When does the agreement become binding?

The exchange of correspondence will form a legally binding contract, enforceable in law. A standard letter will be provided and employers should be warned that the wording may cause some concern because it will inevitably mention the “company’s failure to meet all its obligations”. However, it will be required to bring the inspection to a final close.

When must any amount due be paid?

Payment should be made within the agreed timetable, normally 30 days from the date of the letter accepting the offer. If time is needed to pay the full amount, agreement can normally be obtained to payment being made by instalments. This might then involve a calculation of forward interest on the unpaid liability. If this is likely to be necessary, the HMRC officers should be told at the earliest possible stage. In the current financial climate, they’re more amenable to businesses needing time to pay.

It’s all over - what next?

We’ve already mentioned the post-records inspection action plan and the need for a debrief, but now that the difficult part is over what further action is needed? One of the purposes of an employer compliance review is to educate employers so errors are avoided in future.

Putting the house in order. It’s essential that any errors have been corrected because there may be a follow-up check made by HMRC (often by a different officer), reviewing the next returns that are submitted, to see if the errors have been repeated. There will be another HMRC inspection at some time in the future and that will look for any failures to act on the previous review and any recommendations made. It’s often possible to deal with this over the phone, especially if corrective action has been taken and this can be evidenced with copies of the new guidance issued to staff.

Setting up a regular PAYE health check. Looking to the future, the business might decide to carry out its own review at periodic intervals to ensure that next time it’s ready. An annual internal review of employer compliance procedures is recommended to check that statutory returns are being submitted on time and that payments of PAYE income tax, Class 1, 1A, and if employers have a PSA Class 1B, NI are being paid on time.

And for those in the construction sector. Employers that are also registered as contractors and subcontractors in the HMRC Construction Industry Scheme, must be particularly careful because of the annual automated (Tax Treatment Qualification Test) scheduled review carried out by HMRC with a view to removing gross payment status from businesses that fail to comply with its obligations within the previous twelve months. CIS contractors have the added burden of submitting CIS300 monthly returns and verifying new subcontractors that are engaged to work for the business for the first time or after a gap of more than two years, plus the current year.