PAYE compliance visits can be a tricky business and should your business be selected, HMRC will delve into not only the payroll records but also the expenses and reimbursement procedures, benefits in kind, employment status and shareholder-director dividends. Should they discover errors they can go back up to four years in order to track them.
The initial interview with the payroll administrator will seek to identify any weaknesses in procedures. It is vital at this stage to understand what HMRC are trying to uncover, so that you can provide answers that prove adequacy of procedures. Here are three tips that, if adhered to, can help appease the inspector:
- Director’s Tax Returns: If the company pays for the completion of the director’s tax returns then this should go onto the P11D as a benefit in kind, upon which tax and NIC will be payable. It is therefore advisable to enquire whether your accountant’s invoices can show the tax return preparation fee as a nominal amount (potentially a loss leader for the main company work). The nominal amount should then be declared on the P11D.
- Self-Employed Status: As businesses can save on PAYE and NIC costs through hiring a self employed person, HMRC will ensure that certain criteria are met in order satisfy themselves that a worker is indeed self employed rather than an employee. It is therefore vital that the conditions under which that person works meet the self-employment criteria, and in addition to this, contracts should be in place between not just employer and employee, but also contractor and sub-contractor.
- Dividends: You cannot pay a dividend from the company unless there are sufficient profits to do so. Company law prohibits this and therefore the inspector will check to ensure that this has been observed. Maintaining a spreadsheet which shows the distributable profits and the dividends paid is a good way of indicating that the company is abiding by this rule.
These pointers will not guarantee success in a PAYE inspection, however they are certainly key areas of preparation. And remember, fail to prepare – prepare to fail.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.