Many businesses, at some point, are faced with a letter through their door advising that HM Revenue & Customs are launching an employer compliance review into the practices and procedures around payroll, expenses, benefits, entertaining and a whole host of other employee related matters. An enquiry of this type by HMRC can involve lengthy meetings with their officers and a considerable amount of follow up correspondence in order to close the enquiry. It is also very common for HMRC to request large amounts of information throughout the enquiry process for their review, and can eat up a considerable chunk of internal resource which could be better utilised elsewhere.
In our vast experience of handling enquiries for clients, it has been that the officer at HMRC has not had a clear enough understanding of how a business actually works and have not fully considered the legislation and how it applies in practice to the point they are investigating. A key part of the concluding of an enquiry is then to provide reasoning that the actions taken by a business, that HMRC believe to be flawed, are in fact feasible when taking the legislation and HMRC’s own guidance into full consideration.
Client or Staff Entertaining?
Currently we are seeing HMRC pay close attention to the records kept by a business to back up their client entertaining events. Where the information required by HMRC, as set out in legislation, has not been retained, this can result in a key opportunity for them to determine the events were staff entertaining and seek to recover unpaid income tax and national insurance on the cost on a grossed up basis.
As we all know, it is unrealistic to expect that when day to day business takes over all arrangements are made by email or by post for client entertaining events, when in many cases a phone call can confirm the necessary details. However, in a recent case, HMRC insisted that copies of invitations sent to attendees were provided by one of our clients in order to prove the client nature of an event.
Such documents were not available and on reviewing the legislation and HMRC’s own guidance, we were able to determine that it was not necessary to retain such records. We were able to demonstrate that in line with legislation this was an unreasonable request by HMRC and we were also able to show that the information held by the client was compliant with the relevant guidance without the need for a full paper trail! It was then inevitable that this area of review had to be closed off by HMRC eliminating the chance of any liability arising on the costs.
Another item we have seen raised frequently by HMRC during the course of an enquiry is meals provided by an employer to their employees. As set out in legislation, preferential tax treatment is available on the costs incurred in providing meals to employees on the business premises. However, one key part to obtain the favourable treatment is that the meals are available to all employees. This could therefore be a valuable area for HMRC to investigate and recover unpaid tax if it cannot be proved that all staff are entitled to this benefit.
A particular case where this has been reviewed by HMRC is where one of our clients had employees working both onshore in the office and offshore. In this situation, a subsidised meal was provided at the office onshore, but HMRC required proof that offshore based employees who happened to be onshore at the time were also entitled to the provision for the subsidised meals to qualify.
The client had not given any thought to this and were concerned that they would be required to pay tax and NIC due on the value of the meals, going back over a 4 year period. Upon reviewing their records, we were able to show that the invite had been sent to all staff, not just onshore, as well as demonstrate that it was common practice for all people in the building, whether or not they were sent a formal invitation, to be invited and made aware of the meal on the day.
On this basis, HMRC were satisfied that the client could show the opportunity was available to all staff who may work at the office, even if not based there permanently, and closed off their review on this point with no liability on the business.
Correct Treatment of Termination Payments
In several circumstances, elements of an employee’s termination package are not subject to tax and national insurance as their normal earnings are, however the specific rules around this area are often misunderstood or incorrectly applied by employers. This is a key area where HMRC can review the breakdown of a termination package and request details of how each sum was calculated and taxed to ensure compliance with the relevant legislation. This may include providing HMRC with copies of documents such as settlement agreements, employment contracts and final payslips as well as giving them background information as to the reasoning behind the termination.
Should the payments made have not been processed correctly, substantial liabilities can arise as a result of the enquiry. In order to reduce the likelihood of this, it is important that close attention is paid to the legislation and the nature of each payment with a view to proving to HMRC that the correct compliance has been achieved based on the individual circumstances.
You may have come across either in your own office or in the reception of another business a fruit bowl offering fresh fruit to employees and visitors. You probably wouldn’t even consider that an employee picking up an apple could be controversial, but it proved just that in one of our recent cases!
Given the nature of this type of benefit, most people taking a pragmatic approach would consider it as trivial, and therefore tax exempt.
However, in this case the officer at HMRC was particularly pedantic in that they asked for proof that all employees were invited to take a piece of fruit if they so desired, treating it as a subsidised meal like the above. If the client could not provide this then they intended on charging tax and NIC on the value of the fruit on a grossed up period over 4 years.
However, by providing reference to the legislation and HMRC’s own internal guidance surrounding such trivial benefits, we were able to highlight to HMRC that it was completely unreasonable to expect that proof was necessary to show that all employees were informed of the fruit bowl that they would pass every day.
In addition, we demonstrated that the costs which would be incurred by the client in gathering the information HMRC were requiring would far outweigh any amount they may deem recoverable.
We were able to close this area off with no cost to the client by showing that the provision of the fruit bowl complied with HMRC’s own guidance and that is should be treated as trivial.
Without full responses providing all available information requested by HMRC, it can be difficult to close off an enquiry at the earliest opportunity and can start to eat away at business resources. Without professional support, businesses can also take HMRC’s word as gospel and not think to challenge it which could lead to large liabilities becoming due. As advisors, we’re here to minimise the burden financially, as well as on staff time and resources throughout an enquiry, and support you to a quick closure.
If you have any concerns that your business may be exposed to an enquiry by HMRC or have received notice that an enquiry is being opened, please contact Charlotte Stewart, Integrated Employment Solutions Manager (email@example.com) for more information.