Pay As You Earn - What happens when things go wrong? Pay As You Earn - What happens when things go wrong?

Pay As You Earn - What happens when things go wrong?
30 Jun 2015

Sometimes organisations discover that, for one reason or another, a mistake has been made and there is an underpayment of tax and National Insurance Contributions (NICs) with a corresponding error in the returns they have submitted to HMRC. The underlying reasons for the error could range from a simple mistake in the payroll to expenses fraud or possibly even a history of deliberate understatement of tax

The regime for penalties offers reductions where errors are brought to HMRC’s attention rather than HMRC finding these for themselves during a compliance or Know Your Customer review. As HMRC last year invested £1.1 billion in tackling non-compliance, it is becoming more likely that they will pick up errors than ever before. The use of technology and risk profiling has assisted them greatly.

Different circumstances call for different treatment. Specialist advice will enable the disclosure to be made to HMRC in the right manner, whether to local compliance or another office as appropriate. But why is it so important to manage any disclosure? This article will help you to understand the importance.

Are there downsides of making a disclosure to HMRC?

The only real downside is that if you have found a problem and you are considering making a disclosure it is likely to cost you money. Not only will the underpaid tax and NIC have to be settled but you could also have interest and penalties to pay as well. The time limits for assessment and claims changed in April 2010:

• HMRC cannot go back further than four years for tax (for NIC it remains six years) unless there is evidence of careless behaviour by the taxpayer.
• Where there is carelessness HMRC can go back six years and in the most serious cases of deliberate default, up to 20 years.

However, it should be remembered that the alternative could be far worse - if you do not make a disclosure. HMRC might find the error themselves. HMRC officers are told: ‘a review of compliance with obligations under the Pay As You Earn (PAYE) and NICs regulations should always be included as part of the risk assessment of the company’ (taken from HMRC manuals).

What are the advantages of making a voluntary disclosure?

There are several advantages to an organisation making a disclosure when something has gone wrong and this is why many organisations take this route:

Reduced penalties

Organisations are rewarded for voluntary disclosures across the tax system rather than HMRC finding the errors. The penalty table below shows the difference between errors being ‘unprompted’ (voluntarily disclosed) and ‘prompted’ (HMRC discovered).

Being in control

Making a voluntary disclosure gives the employer and advisor much more control in how the situation is dealt with. For example, a good disclosure should include all the facts - how the errors were made and subsequently discovered, what changes are going to be made to make sure they do not happen again or at least how the risk will be managed in future. This might include:

• Addressing the issue that resulted in the underpayment arising
• Reviewing and making sure there are upto- date and robust policies in place
• Ensuring processes and procedures are now fit for purpose
• Making sure that no other errors or areas of concern are waiting to be discovered.

Again, this could help soften the penalties likely to be given, but also generally results in less intervention from HMRC. It also means that you are in control of the timing, this can help when you have many other normal dayto- day issues to deal with.

Negotiation

Where the issue is unclear it is far easier to negotiate a better settlement when errors or concerns have been raised with HMRC upfront. Negotiation may occur around the amount of the settlement (years under review, how it is calculated, actuals or estimates) and the penalties. Of course this can still be done after an HMRC review but often with less chance of success.

Better relationship with HMRC

HMRC undertakes a risk profiling of organisations and those considered high risk or in HMRC terms ‘non low risk’ so PAYE compliance will have more interventions than they did before. Demonstrating a proactive and robust approach when making a voluntary disclosure can therefore result in no change to your risk rating (where it is currently low) or a possible move over time to ‘low’ and a better long-term relationship with HMRC as they continue to encourage voluntary disclosures (HMRC MANUAL CCM2210)

Penalties

HMRC’s information powers and penalty regime enables them to heavily penalise anything other than a genuine mistake. The good news is the penalty regime recognises the value of making a voluntary disclosure. Various regimes apply depending on the behaviour of the organisation, for example, a deliberate failure will be penalised more heavily than a failure where the organisation simply did not take enough care.

The law defines ‘careless’ as a failure to take reasonable care. Everyone should take reasonable care, but reasonable care cannot be identified without consideration of the particular abilities and circumstances of the organisation concerned hence HMRC will want to know how a problem arose.

For example, organisations with simple straightforward tax affairs need only a simple regime provided they follow it carefully. But an organisation with larger and more complex tax affairs will need to put in place more sophisticated systems and follow them equally and carefully. HMRC expects each organisation to produce and preserve sufficient records in order to make a correct and complete return.

Behaviour

Penalty

range for

unprompted

disclosure

Penalty range

for prompted

disclosure

Careless

 

0% - 30%

15% - 30%

Deliberate but

not concealed

20% - 70%

35% - 70%

Deliberate and

concealed

30% - 100%

50% - 100%

Case study

During an Employer Compliance review the HMRC compliance officer advises Able Ltd that reimbursement of private phone bills should be dealt with through the payroll and that PAYE and Class 1 NICs must be deducted accordingly.

When Able Ltd sends HMRC its next end of year return they carry out a review and discover that the company has not followed the advice given by the compliance officer and the end of year return is wrong as a result.

This indicates that Able Ltd has at least failed to take reasonable care because it has ignored the advice given by HMRC.

Top tips


• Investigate what went wrong
• Consider using a HMRC disclosure facility
• Consider how to make your voluntary disclosure and to whom. Do you have an HMRC customer relations manager?
• Consider the impact on your senior accounting officer’s (or similar) responsibilities
• Calculate the tax and NIC underpaid
• Consider the penalty position
• Review the policies and control
procedures that resulted in the error and improve where possible
• Make the disclosure to HMRC, explaining exactly what happened, the liability due and what procedures have been changed
• Consider payments on account. Do you need to consider ability to pay?
• Ask for a contract settlement at the end (ie make sure the case is finally closed).

Conclusion

Whilst no one likes admitting mistakes, especially when it could cost the organisation money in the form of tax or NIC, interest and possible penalties. But making a voluntary disclosure when mistakes are identified is absolutely the best thing to do, not just morally or even ethically, but because in the longer term open communication with HMRC does bring benefits. Whilst care should be taken in making a voluntary disclosure to maximise the advantages, it should be considered the right outcome for all.

The Voluntary Disclosure Team can be written to at the following address: HMRC Local Compliance Centres Campaigns Voluntary Disclosure Team S0790 PO Box 3900 Glasgow G70 6AA.

By Susan Ball

Susan Ball is head of the employment advisory team at Crowe Clark Whitehill, a leading national audit, tax and advisory firm.

 

Sometimes organisations discover that, for one reason or another, a mistake has been made and there is an underpayment of tax and National Insurance Contributions (NICs) with a corresponding error in the returns they have submitted to HMRC. The underlying reasons for the error could range from a simple mistake in the payroll to expenses fraud or possibly even a history of deliberate understatement of tax

The regime for penalties offers reductions where errors are brought to HMRC’s attention rather than HMRC finding these for themselves during a compliance or Know Your Customer review. As HMRC last year invested £1.1 billion in tackling non-compliance, it is becoming more likely that they will pick up errors than ever before. The use of technology and risk profiling has assisted them greatly.

Different circumstances call for different treatment. Specialist advice will enable the disclosure to be made to HMRC in the right manner, whether to local compliance or another office as appropriate. But why is it so important to manage any disclosure? This article will help you to understand the importance.

Are there downsides of making a disclosure to HMRC?

The only real downside is that if you have found a problem and you are considering making a disclosure it is likely to cost you money. Not only will the underpaid tax and NIC have to be settled but you could also have interest and penalties to pay as well. The time limits for assessment and claims changed in April 2010:

• HMRC cannot go back further than four years for tax (for NIC it remains six years) unless there is evidence of careless behaviour by the taxpayer.
• Where there is carelessness HMRC can go back six years and in the most serious cases of deliberate default, up to 20 years.

However, it should be remembered that the alternative could be far worse - if you do not make a disclosure. HMRC might find the error themselves. HMRC officers are told: ‘a review of compliance with obligations under the Pay As You Earn (PAYE) and NICs regulations should always be included as part of the risk assessment of the company’ (taken from HMRC manuals).

What are the advantages of making a voluntary disclosure?

There are several advantages to an organisation making a disclosure when something has gone wrong and this is why many organisations take this route:

Reduced penalties

Organisations are rewarded for voluntary disclosures across the tax system rather than HMRC finding the errors. The penalty table below shows the difference between errors being ‘unprompted’ (voluntarily disclosed) and ‘prompted’ (HMRC discovered).

Being in control

Making a voluntary disclosure gives the employer and advisor much more control in how the situation is dealt with. For example, a good disclosure should include all the facts - how the errors were made and subsequently discovered, what changes are going to be made to make sure they do not happen again or at least how the risk will be managed in future. This might include:

• Addressing the issue that resulted in the underpayment arising
• Reviewing and making sure there are upto- date and robust policies in place
• Ensuring processes and procedures are now fit for purpose
• Making sure that no other errors or areas of concern are waiting to be discovered.

Again, this could help soften the penalties likely to be given, but also generally results in less intervention from HMRC. It also means that you are in control of the timing, this can help when you have many other normal dayto- day issues to deal with.

Negotiation

Where the issue is unclear it is far easier to negotiate a better settlement when errors or concerns have been raised with HMRC upfront. Negotiation may occur around the amount of the settlement (years under review, how it is calculated, actuals or estimates) and the penalties. Of course this can still be done after an HMRC review but often with less chance of success.

Better relationship with HMRC

HMRC undertakes a risk profiling of organisations and those considered high risk or in HMRC terms ‘non low risk’ so PAYE compliance will have more interventions than they did before. Demonstrating a proactive and robust approach when making a voluntary disclosure can therefore result in no change to your risk rating (where it is currently low) or a possible move over time to ‘low’ and a better long-term relationship with HMRC as they continue to encourage voluntary disclosures (HMRC MANUAL CCM2210)

Penalties

HMRC’s information powers and penalty regime enables them to heavily penalise anything other than a genuine mistake. The good news is the penalty regime recognises the value of making a voluntary disclosure. Various regimes apply depending on the behaviour of the organisation, for example, a deliberate failure will be penalised more heavily than a failure where the organisation simply did not take enough care.

The law defines ‘careless’ as a failure to take reasonable care. Everyone should take reasonable care, but reasonable care cannot be identified without consideration of the particular abilities and circumstances of the organisation concerned hence HMRC will want to know how a problem arose.

For example, organisations with simple straightforward tax affairs need only a simple regime provided they follow it carefully. But an organisation with larger and more complex tax affairs will need to put in place more sophisticated systems and follow them equally and carefully. HMRC expects each organisation to produce and preserve sufficient records in order to make a correct and complete return.

Behaviour

Penalty

range for

unprompted

disclosure

Penalty range

for prompted

disclosure

Careless

 

0% - 30%

15% - 30%

Deliberate but

not concealed

20% - 70%

35% - 70%

Deliberate and

concealed

30% - 100%

50% - 100%

Case study

During an Employer Compliance review the HMRC compliance officer advises Able Ltd that reimbursement of private phone bills should be dealt with through the payroll and that PAYE and Class 1 NICs must be deducted accordingly.

When Able Ltd sends HMRC its next end of year return they carry out a review and discover that the company has not followed the advice given by the compliance officer and the end of year return is wrong as a result.

This indicates that Able Ltd has at least failed to take reasonable care because it has ignored the advice given by HMRC.

Top tips


• Investigate what went wrong
• Consider using a HMRC disclosure facility
• Consider how to make your voluntary disclosure and to whom. Do you have an HMRC customer relations manager?
• Consider the impact on your senior accounting officer’s (or similar) responsibilities
• Calculate the tax and NIC underpaid
• Consider the penalty position
• Review the policies and control
procedures that resulted in the error and improve where possible
• Make the disclosure to HMRC, explaining exactly what happened, the liability due and what procedures have been changed
• Consider payments on account. Do you need to consider ability to pay?
• Ask for a contract settlement at the end (ie make sure the case is finally closed).

Conclusion

Whilst no one likes admitting mistakes, especially when it could cost the organisation money in the form of tax or NIC, interest and possible penalties. But making a voluntary disclosure when mistakes are identified is absolutely the best thing to do, not just morally or even ethically, but because in the longer term open communication with HMRC does bring benefits. Whilst care should be taken in making a voluntary disclosure to maximise the advantages, it should be considered the right outcome for all.

The Voluntary Disclosure Team can be written to at the following address: HMRC Local Compliance Centres Campaigns Voluntary Disclosure Team S0790 PO Box 3900 Glasgow G70 6AA.

By Susan Ball

Susan Ball is head of the employment advisory team at Crowe Clark Whitehill, a leading national audit, tax and advisory firm.