13 Aug 2012 | 02:08 pm | 3 min. read
The number of businesses that HM Revenue & Customs (HMRC) considers to be at risk of not paying their staff’s payroll tax and National Insurance has shot up around a fifth over the last year, says Pinsent Masons, the international law firm.
Pinsent Masons explains that some fraudulent businesses will deduct income tax and national insurance contributions (NIC) from their employees’ payslips and then close the business and disappear once it is clear that HMRC is on their trail.
This can leave employees facing a NIC shortfall towards their State pension and even having to pay a bill for income tax that has already been docked from their wages.
Businesses considered a risk by HMRC are investigated through Employer Compliance Reviews. HMRC opened 1,599 Employer Compliance Reviews into businesses they saw as a risk in the last year up 18% from 1,350 the year before (year end March 31).
HMRC is also clamping down on those businesses who are trying to evade tax by not telling HMRC about taxable staff benefits like company cars or who have simply fallen behind with their payroll taxes because of the recession.
Although HMRC is stepping up the number of investigations into businesses that have aroused their suspicions, relatively few cases of fraud are identified until the business has become insolvent.
Phil Berwick, Director at Pinsent Masons, explains: “If an employee has payslips that show the tax and NIC was deducted, they shouldn’t have to pay over the tax or NIC a second time. But if there is no record that the tax and NIC was deducted then HMRC might end up coming after the employee.”
“Even if the issue is caused by administrative errors at a business, the employee can be the one in trouble with HMRC. Company cars, for example, are often not reported properly to HMRC because of a lack of communication between the HR and finance teams. HMRC can be unsympathetic to those that have had the benefit of a BMW 7 Series but haven’t checked they’d paid the tax on it. Paying tax on benefits is the responsibility of the employee not the employer.”
Pinsent Masons adds that struggling businesses considering withholding payroll taxes from HMRC, or businesses with lax systems for calculating payroll taxes, need to consider the risks involved in not complying with HMRC.
Phil Berwick says: “It’s a sign of the times that the number of businesses that HMRC consider a payment risk has shot up – this might get worse as HMRC continues to tighten up “Time to Pay” arrangements.”
“When businesses begin to run into difficulty, many of them begin to use HMRC as a bank by not paying over the payroll taxes they collect. HMRC can be seen by some as a source of interest-free cash.”
“Businesses in financial trouble need to think very carefully about not paying what is due to HMRC. They could dig themselves into an even deeper hole. HMRC is likely to come down on a business like a tonne of bricks if it thinks it’s being underpaid.”
“No business is exempt. For example HMRC has tried to put into administration a whole series of league football clubs that have fallen behind with payments of their payroll tax.”
New HMRC powers
Pinsent Masons says that since April 2012, HMRC has had the power to demand an up-front financial security from companies that are considered at very serious risk of not paying over PAYE or National Insurance Contributions (NICs). Non-payment of the security could trigger a prosecution and fine of up to £5,000.
The security demanded by HMRC is based on the amount of PAYE and NIC paid or due to be paid by the employer over a four month period, plus an amount equal to any current arrears of PAYE and NICs due from the employer.
HMRC says it introduced the financial security to combat PAYE frauds, such as ‘phoenix’ companies. These are successive companies that are set up and closed down by individuals that collect PAYE and NICs but never pass these on to HMRC.
However, Pinsent Masons warns that the financial securities could end up hurting businesses that are genuinely struggling.
Phil Berwick explains: “HMRC has a very wide range of indicators that they use to identify potential payment risks. These indicators are possibly a bit too wide. A combination of several small compliance failures, such as not responding to letters from HMRC or filling in a form incorrectly could be enough to trip one of their risk indicators and trigger a compliance review.”
“HMRC says that it won’t apply penalties to firms in genuine difficulty, and that it will try and seek a voluntary settlement of any underpaid taxes, but it can be very difficult to make HMRC accept that a business is having genuine problems.”
“For a struggling business, having to find a significant financial security to hand over up-front to HMRC could compound any financial problems. Paying a £5k fine is not a soft option as it results in a criminal record.”
Phil Berwick adds: “On top of this, it’s hard for struggling businesses to get independent help or financial advice. The Tribunals Service is meant to be there to provide an avenue to challenge HMRC, but the costs and time involved block this route for businesses in genuine trouble.”
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