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Tax Audits – What To Do When HMRC Comes Calling
HMRC can seem an intimidating body, particularly when notification of an audit is received. Regardless of which fiscal authority and jurisdiction, advice on how to manage any review will be remarkably similar. The employer will need to consider preparation for the audit, the audit itself and, perhaps most importantly, managing the relationship with HMRC or the relevant authority. Taxand UK reviews the areas employers should consider when preparing for an audit by HMRC.
Recently, HMRC's approach has moved from performing a major PAYE audit every three to six years to conducting aspect reviews in "risk" areas in which HMRC identifies a high probability that systems or processes may not be compliant, whether from recent regulatory changes or due to complex compliance requirements. HMRC will also perform combined audits, reviewing Corporate Tax and VAT compliance in conjunction with a review of Employment Tax.
All businesses should strive to consistently maintain a good standard of compliance, regardless of impending HMRC audits. Internal reviews are useful maintenance tools, and provide invaluable background when HMRC notifies its intention to conduct an audit. A simple internal review can consist of identifying what audits the business might be subject to, and confirming whether any have been performed in the past, noting the date and results. Finally, review previous records to confirm whether action points were followed up on. Failure to comply will be noted by HMRC (at best, this creates a negative perception and, at worst, could result in a guarantee of penalties for not rectifying matters). If an employer feels comfortable with the potential outcome of an HMRC audit, there is little to do at this stage other than maintain good compliance. When an initial review raises concerns, many employers choose to enlist the help of advisers to conduct a more detailed review of the main areas of interest to HMRC. If a business conducts reviews before HMRC has notified of an intention to review, there is scope to act on the findings, correct any irregularities and settle significant liabilities through a voluntary disclosure to HMRC or, where appropriate, include the items in a PAYE Settlement Agreement (PSA) on the payroll or report on form P11D.
When preparing for the actual audit, consideration should be given to what records HMRC will want to see, where those records are housed and which staff members need to participate in the audit. Understanding early on how HMRC wishes to conduct the review and what it considers to be relevant information, can make the audit seem less daunting. The main areas of Employment Tax HMRC are likely to review include:
- Core payroll compliance
- Review of the PSA
- Review of forms P11D / dispensation
- Audit of car schemes
- Salary sacrifice arrangements
- Construction Industry Scheme (CIS)
- Share schemes
- Expat arrangement
- Bonus arrangements
When HMRC notifies of an intention to audit, the prudent step is to confirm that the employer is comfortable with the potential outcome or conduct an internal review prior to the audit. Thought should be given to how information will be presented and how representative it is of the business. Clearly, nothing should be withheld and HMRC must not be misled. Errors which clearly give rise to a liability should be brought to HMRC's attention as soon as possible.
From the very beginning, the business needs to understand what HMRC wants to achieve through the review. This includes how it wishes to conduct the review; what information it wants to review; who it might want to interview; and what facilities it might want to visit. By clearly explaining their business to HMRC, employers ensure that HMRC will understand what the business is, how it is structured, how it operates and from where it operates. This often heads off a lot of questions HMRC might otherwise have.
Our experience is that having a 'project manager' who acts as a liaison with HMRC makes a big difference to the overall experience. The liaison role can ensure that:
- Individuals from the business side attending these meetings are fully briefed before hand and rehearsed so they fully understand what they are doing, why they are doing it, and what information they need to provide to HMRC
- HMRC is met in reception, provided with a timetable, and that relevant staff members are available
- The visit is kept to the agreed timetable and that no unwanted or irrelevant information is provided to HMRC
- Information posted on notice boards and in the reception area is appropriate and doesn't encourage queries
When handling an audit, it can be easy to forget HMRC representatives are individuals themselves. Adopting a business-friendly approach without being too formal helps to keep proceedings good humoured. Often, it can be a good idea to join the HMRC team for lunch, as it provides an opportunity to respond to any questions that may have cropped up and to get to know the HMRC team. If serious irregularities are discovered, the tone can be easily shifted to become more formal. Greater progress, and a better working relationship, usually results if the tone is kept open and business-friendly.
Simple courtesies that are not always extended to HMRC include:
- Providing directions to the business location and reserving a parking space if needed
- Providing housekeeping information, including the location of toilets
- Providing refreshments, including lunch, tea, coffee and water
- Providing a suitable working area for HMRC staff that is separate from the general office so they are not interrupted by the daily bustle of the business
All questions should be answered truthfully and to the best of an individual's knowledge and ability. Being over-eager to help in an area in which knowledge is sketchy can have the opposite of the intended effect of being helpful. If an individual doesn't know the answer to specific questions, it is better to respond that they will find out, keeping in mind that it may take some time to respond. Where HMRC has a number of queries, it would be better to get these in writing. It is easier to pass them onto relevant colleagues who have the information and ensures that the requests are not misunderstood further down the line.
At all times, ensure that HMRC appreciates that the business wants to assist and genuinely takes all Tax and National Insurance compliance very seriously.
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