PAYE And NI Compliance Visits

Background

It is apparent that there have been an increased number of P.A.Y.E. and N.I. compliance visits to employers, both locally and nationally, over the last few years. HM Revenue & Customs introduced a new Initiative called “Business Records Checks” which was supposed to be a way of helping employers comply with their legal obligations and to spot problems before they had gone on too long. However, this initiative had a fraught gestation period with serious concerns by employers and their accountants that these visits were turning into “fishing expeditions” for tax investigations. There was mutual mistrust. HMRC were and probably still are convinced that employers are not complying with the rules and employers mistrust HM Revenue & Customs motives.

An internal review by HM Revenue & Customs had recommended turning the checks into more tightly targeted interventions. The likelihood is that the idea of such visits will be resurrected in a modified format.

Types of Visit

There are two types of visit:

  • Announced and

  • Unannounced.

Announced visits will be arranged in advance normally with 7 days notice (unless the taxpayer wishes it to be less). A notice of a visit will give

  • The date and time

  • Place of the visit

  • The name of the HMRC Officers who will visit

  • Which records they will want to see.

The legislation only allows the officer to inspect documents that are on the premises being inspected. If the officer wishes to insist that records are made available during the visit which would not normally fall into this category he/she would be able to make the request informally but if the taxpayer did not co-operate he/she would have to issue a formal notice for their production.

Unannounced visits are designed to enable HMRC to deal with the hidden economy and other cases of serious non-compliance. HMRC cite examples where they consider it may be appropriate to carry out such visits without prior arrangement. One such example is in respect of businesses which use electronic cash registers. The example states

Some electronic cash registered can be reprogrammed in ways that result in under recording of sales. A programme of risk-targeted visits without prior arrangement to check cash registered has found widespread irregularities. It is likely that if the visits had been arranged in advance the registers would have been set to normal

The guidance gives the following situations where an unannounced visit could be deemed necessary:

  • Where business taxpayers have repeatedly missed appointments

  • Where deliberate understatement will only be evidenced if the visit is unannounced for example

    • Failure to register for vat.

    • Failing to operate PAYE on illicit casual workers.

    • Suppressing cash takings. Eg by operating a second till

    • Trading in a second off the books activity.

    • Missing Trader VAT and Labour Provider fraud cases.

  • Where there is a risk that the business may have been established to facilitate fraudulent tax repayments.

Such visits will only be allowed when approved by an Authorised Officer who is going to be of appropriate seniority. We are assured that there is going to be a code of practice governing these procedures.

If the notice is one without notice, a notice in writing must be provided at the commencement of the inspection to either

  • The occupier of the premises if he is present at the time the inspection is to begin.

  • If the occupier is not present but a person who appears to be in charge of the premises is present, the notice must be provided to that person.

  • In any other case, the notice must be left in a prominent place (free from public gaze and safe from the elements) or sent to the occupant’s main postal address.

There is no right of appeal against this inspection power!

Not Just PAYE & NI

Since the merger some years ago of the Inland Revenue and HM Revenue & Customs it has become increasingly common for those carrying out the visit to look at not just PAYE matters but also any VAT implications.

Right of Entry

As mentioned above there is no right of appeal against this inspection power. The rationale appears to be that the inspection would relate to business information which HMRC already have a statutory right to see. However, it is the timing of an inspection that is likely to cause the greatest problem. If entry to a business is refused or it is anticipated by HMRC that entry will be refused HMRC will seek approval for the inspection in advance from The Tribunal. This then allows HMRC to impose penalties if non-compliance continues.

However, the following comments, taken from the HMRC Compliance manual) are interesting.

  • The person whose tax position you are checking or occupier of the premises you wish to inspect has the right to refuse you entry. It cannot be overridden, so a person retains the right to refuse entry to their property even when an officer has a right to enter and inspect with tribunal approval.

  • Where the occupier of the premises asks you to leave during the course of an inspection you must do so immediately.

There is a penalty for deliberately obstructing an officer in the exercise of the visit powers under a First Tier Tribunal notice but the above commentary suggests that politely refusing admission is not the same as deliberate obstruction.

Places that can be visited

There is no right of entry to inspect any part of the premises that is used solely as a dwelling. This is the provision within the legislation. However, there is some concern because HMRC seem to feel that this provision is not unduly restrictive (upon them). In their internal guidance they state “although it will not normally be necessary sometimes you may need to carry out an inspection at a persons private residence to address an identified riskThis is not really in line with the legislation although they do acknowledge that they do not have a right to enter or inspect any part of the premises that are used solely as a dwelling.

However, HMRC are clear that private residence may fall within the definition of business premises where:

  • The business is run from home

  • Business assets are stored at home

  • Business Records are kept at home (unless just for storage purposes)

  • A home is registered as the principal place of business for VAT.

The guidance then gives examples of when it is reasonable (in HMRC’s view) to visit a private residence.

  • Where stock is kept at home

  • In the case of an outworker – the stock or assets kept at their home may be inspected (although it indicates that the taxpayer should be given the opportunity to make the items available for inspection elsewhere if this is practical).

  • At a farm – The office, fields, barn and areas involved in business activity can be visited.

  • In a pub – the cellar, bar, commercial kitchen, store rooms, and any vacant rooms which are let can be visited.

  • Shops with flats above – the commercial premises, including offices and store rooms can be visited at retail and wholesale sites.

  • Guest Houses/Hotels – the bedrooms, areas available for guest use, kitchens used to prepare guest meals, store rooms and offices can be visited.

  • Surgeries – the offices and waiting rooms can be visited as can any consulting rooms not in use.

  • Where it is appropriate to physically check the proportion of household expenses claimed as a tax deduction is reasonable.

  • Where there is evidence that a home is used for a business and that business has not been declared to HMRC.

  • Where there is evidence that the business connected with the premises is being misrepresented to HMRC.

But it is NOT reasonable to visit domestic premises in the following circumstances

  • A director or employee is working from home

  • A director or employee has temporarily taken some records home from other business premises to work on.

  • Premises rented to another person are used solely by them as their home.

If there is any dispute about whether a premises is a business premises the visiting officer is instructed to get authority of the relevant authorised officer before the visit.

Copying Documents

The officer can take copies or make extracts from documents produced or inspected. If there are mo copying facilities, then the documents can be removed if necessary with a receipt provided as standard. No access is available to documents which could not be obtained using the information powers described in the previous section.

Searching and rummaging

Whether it is to the business premises or a private residence used partially for business, the officer has the power to enter and inspect. This means, in simplistic terms, that the officer can look at what they can see but may not search for something that they cannot see. This does not mean that they cannot touch or open things but in most cases they would have to seek the permission of the taxpayer to do this. So they can examine records and inspect premises and assets by looking at them.

As their instructions make clear officers cannot “search, rummage or wander around unaccompanied without the taxpayers consent!

What the taxman’s own instructions tell him/her:

Para.25160 gives examples to the taxman of what inspect means.

  1. You are walking along a corridor with a representative of the business and come to a door in the corridor. He goes through but the door slips and closes in front of you. You may touch the door to open it and continue.

  2. You are shown into a room in which the books, records and invoices you asked for have been places on a table for inspection. You are allowed to open the files and boxes of records that have been collected. You are allowed to walk around and look at the pictures on the wall. You are not allowed to open the filing cabinet in the corner just to see what it in it.

  3. You are shown to a room in which the accounting records you asked for have been placed on a table for inspection. You are told the invoices are in the filing cabinet in the corner. You may open the filing cabinet to inspect any invoices that you may want to.

  4. You are inspecting premises used in connection with taxable supplies and there is a deliver van in the yard awaiting to offload goods. You are allowed to open the door – remember health and safety- as means of transport such as cars and vans are, for these purposes, premises. You may look at the boxes inside. You are allowed to climb inside and look at the boxes you cannot see from outside. You should ask the trader to open any boxes you want opening so you can check the tax position of what is inside. It should be very rare to want to inspect goods waiting to be sent for delivery. You are not allowed to open the driver’s holdall.

The following comments are also relevant.

“You should be polite and considerate at all times. You must act in accordance with HMRC guidance. You should carry out your duties in a professional manner, respecting confidentiality and privacy. You should be discreet when on visits or at meetings. Bear in mind taxpayers will not usually wish to discuss their tax affairs in front of their staff, customers, other taxpayers or their family. At the start of your check you should have an open mind as to whether the correct amount of tax has been paid. You should have in the front of your mind HMRC’s commitment to reduce the administrative burden of compliance activity on taxpayers and be customer focused at all times.”

Our Comment:

Well that will make a pleasant change from the usual dealings with HMRC on the telephone!

So what’s new?

It will enable HMRC officers to undertake work at business premises, if that would be helpful (to them). There have been cases where such visits and review of records have been done with the agreement of the taxpayer. It is suspected that these visits will become more of a routine occurrence although the fact that HMRC officers will not insist on access in most circumstances means that the taxpayer who wishes to resist such intrusion may still be able to do so.

On the information currently available, and experience to date of the new regime, it would appear that

  • The boundary between inspections and full enquiries has become more blurred

  • The normal starting point for an enquiry will no longer be a letter asking for the records and additional information to be sent to an HMRC office but rather a self-invitation for the HMRC officer to attend the business to undertake a records review there.

The change may be more noticeable for non-compliant taxpayers where there is a more straightforward way (ie not involving a Court request) which will allow HMRC officers more immediate access to their business. This is likely to represent a small percentage of all visits though.

Our Alternative

We offer an alternative to a visit to our clients business or home premises. That is simply that we provide facilities for the HMRC Officer to inspect the client’s records which the client brings to our offices. Our experience is that this is often acceptable to HMRC and is less stressful for our clients.

Risk

It is important that we are contacted prior to an inspection taking place, so that we may give appropriate advice, especially on the statutory rights of the inspection officers or to offer our alternative of the records being inspected at our offices.

Visits are being targeted on a risk basis and inspectors are, therefore, principally visiting employers where they believe errors may be found.

The most productive areas for HMRC inspectors are:

  1. Casual employees without signed forms P.46.

  2. Self employed "contractors", who are really employees.

  3. Class 1A N.I. not paid or underpaid.

  4. N.I. on personal bills (especially telephone bills in the name of the employee).

  5. Expenses paid not shown on forms P11D or included in a dispensation.

We believe that contact with us prior to an inspection visit taking place is essential so that we may ensure that clients are properly advised on the implications of a visit.

This advice should assist in ensuring that assessments are not issued in potentially inflated amounts, thereby saving clients stress and time later on.

Prevention Is Better Than Cure

Leaving things until a visit it proposed may be inviting trouble and leave the taxpayer with inadequate time to

  • Discover or highlight potential problems

  • Take action to put things right

  • Get missing paperwork in place

One of the ways we can help you is by carrying out a health check on your P.A.Y.E. and N.I. obligations. It may not be possible to identify every potential problem but we can help you identify and eliminate or at least mitigate as many as possible thus reducing your expose and risk.

To find out how Handley Evans & Co can help you contact us

For information of users:
This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.