HMRC PAYE Checks

These go far beyond tax and national insurance. A PAYE check investigates all income and expenditure which may be deemed to be taxable.

Scope of PAYE Checks

The stated objective of HMRC PAYE checks is to ensure compliance with the rules governing PAYE, corporation tax, benefits in kind, expense accounts, dividends and director’s loan accounts.

Although there is no official link between investigating business taxes and VAT, that will nevertheless be checked and passed on to VAT inspectors if anything is found to be wanting.

Penalties for Potential Loss of Taxes

Inaccuracies and their penalties are graded according to perceived behaviour. They are further graded according to whether their disclosure is regarded as “unprompted” or “prompted.”

What that means is that if you voluntarily disclose information to HMRC about an inaccuracy of which they were previously unaware it is unprompted but if they discover something themselves, it is prompted.

The penalties HMRC will levy for potential loss of revenue on top of any tax and interest they may assess and how your perceived behaviour defines their scales are as follows:

Penalties Prompted Unprompted
Reasonable Care 0% 0%
Careless 0% - 30% 15% - 30%
Deliberate 20% - 70% 35% - 70%
Deliberate and Concealed 30% - 100% 50% - 100%


Deliberate and concealed inaccuracies that result in loss of tax revenue can also result in criminal prosecution in addition to the tax charges and penalties. This is highly likely in the event of substantial, deliberate and concealed inaccuracies.

You have the right to appeal any penalties. An appeal is likely to call for professional representation however.

Likely Areas of Investigation

  1. PAYE procedures and records such as P60, P45; P46 and P38S documents.
  2. Expenses: Including receipts, dates, details, value and proof of validation i.e. authorised for payment.
  3. Payments to freelance providers and compliance with CIS in the case of the construction industry.
  4. Cash book and till receipts data.
  5. Records / documents supporting sales, purchases and overheads transactions.
  6. Records / documents detailing the acquisition and disposal of fixed assets.
  7. Details of all debts owed by or to the business.
  8. Stock records and valuations plus details of all individual sales (retailers exempt for detailed sales).
  9. Dividend resolutions, copy tax credit vouchers and evidence of available profits when declared.
  10. Details of Directors' loan accounts
  11. Details of payments to or on behalf of directors as benefits in kind.
  12. Details of payments to or on behalf of employees as benefits in kind.

Maintaining Adequate Records

All of the above can be produced and stored electronically as long as they can be produced in a readable form.

HMRC may call for hard copies if they conclude that further checks are necessary. A check revealing a simple oversight or misallocation is not the only thing that can attract penalties. They can also apply if your financial records are deemed to be inadequate to enable accurate calculation of tax liabilities.

Business Records Checks

It is a legal requirement to maintain complete and up to date business records in order to enable accurate assessments of tax liabilities.

This has led to a recent addition to HMRC's powers of investigation of checking the compliance of business records with that. Introduced in late 2012 this potentially carries its own penalties. Small and newer businesses are the most likely targets.

Representation

You do not necessarily have to deal directly with an HMRC PAYE check yourself. If you wish this can be undertaken on your behalf by an expert third party, which would normally be your accountant. Although that will incur costs it may well mitigate potential penalties.

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