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Inland Revenue pay-as-you-earn auditors sometimes raise issues that can be sorted out without incurring further tax and National Insurance, explains MARK MORTON.
I RECENTLY BECAME involved with a company which had received its initial pay-as-you-earn audit visit. The letter sent out after this visit identified certain areas of risk. To be fair to the Inland Revenue official concerned, he remained friendly and approachable throughout the process, but his approach left me wondering how many other businesses around the country suffer in similar fashion.
Inland Revenue pay-as-you-earn auditors sometimes raise issues that can be sorted out without incurring further tax and National Insurance, explains MARK MORTON.
I RECENTLY BECAME involved with a company which had received its initial pay-as-you-earn audit visit. The letter sent out after this visit identified certain areas of risk. To be fair to the Inland Revenue official concerned, he remained friendly and approachable throughout the process, but his approach left me wondering how many other businesses around the country suffer in similar fashion.
The main areas of concern detailed by the Revenue were as follows.
Hostesses
The company is in the business of providing courses to certain professionals. These have a course administrator to welcome delegates and generally ensure that the course runs smoothly. The company had correctly treated these administrators as employees, although an argument could have been put forward regarding self employment. In some months, the course administrators do not do any work, whereas in other months they can hostess up to ten courses. As with all other staff employed by the company, the administrators are paid on a monthly basis.
Following the initial pay-as-you-earn audit, the Revenue wrote to the company, but also to all of the administrators personally without mentioning this to the company, stating that Regulation 3(2) of the Social Security (Contributions) Regulations 2001 would be invoked for subsequent payments, as:
'Although National Insurance contributions are being paid in accordance with the social security legislation, the long term effect of such a pay practice is that the employees' earnings are subjected to less National Insurance contributions than a similar amount paid over regular periods. This would mean that pay for course administrators should be calculated using an earnings period relevant to each session worked, regardless of the interval at which they are paid.'
The effect of these letters to the administrators was for the company to be inundated with concerned telephone calls asking exactly what was going on. The company had not been informed regarding these letters and consequently did not know what was going on. Research showed that Regulation 3(2) allows the Revenue to choose the longer of two or more regular intervals of payment where a pay practice which, although perfectly legitimate, is likely to affect an individual's earnings factor for benefit purposes (see National Insurance Manual at paragraph 8200). It does not allow the Revenue to shorten an earnings period, which is what the Revenue was suggesting.
Apart from the upset and aggravation caused by letters being sent directly to the administrators, a point that was made to the Revenue, its argument was technically unsound. Consequently, it responded by saying that it had meant to invoke Regulation 31 of the same legislation. Regulation 31 allows the Revenue to shorten a pay period where there are irregular payments made to employees. There were, however, no irregular payments being made, quite the opposite. The administrators were paid on a regular monthly basis for the work that they did in that month. In some months there was no work and consequently they were not paid. In addition, National Insurance Manual at paragraph 8330 points out that:
'The department has decided that, as a general rule, in order to exclude relatively minor National Insurance contributions irregularities, where the pay practice reduces the amount of contributions payable by at least £250 a year, a direction should be considered.'
In this case, none of the administrators concerned exceeded this figure. In one particular circumstance, the additional National Insurance contributions which would have been due by imposing a weekly rather than monthly pay period totalled the grand sum of £6.97. After making the above points to the Revenue, it agreed to leave the monthly pay practice untouched.
Ex gratia payment
An ex gratia payment of £5,000 had been made to an employee who had been with the company for 18 years and helped the company grow from its inception into the sizeable business it has now become. The Revenue asked to see the original contract, which was duly provided. It accepted that there was no contractual or unwritten entitlement to this money and consequently the payment was not taxable.
However, Finance Act 2002 should be noted. While this does not change existing legislation, it does make the point that where the £30,000 exemption under section 148, Taxes Act 1988 is being considered, then the legislation regarding payments to unapproved retirement benefit schemes should take priority, that is it should be considered before section 148.
Consequently, where individuals retire and an attempt is being made to use section 148, the Revenue will more commonly raise the point of whether or not this individual was retiring. If he was, it is highly likely that any payment linked with his leaving the company will be taxable as a payment to an unapproved retirement benefit scheme. There are certain de minimis limits, and prior Revenue approval is available for such payments (see Statement of Practice 13/91, Schedule E Manual at paragraph SE15000 et seq and Readers' Forum query 'Pursuing compensation' with replies in Taxation, 19 September 2002 at pages 691 to 692).
Staff entertainment
The company pays for staff to visit the local pub on the last Friday of each month for a staff meeting. However, there was little scope for arguing this point and it was accepted that these items should have been included in the company's pay-as-you-earn settlement agreement. However, the Revenue made the point that there are no interest or penalties on grossed-up tax payable.
Car fuel benefits
The company runs a fleet of company cars and reimburses the employees for business miles in company cars at a rate of 14 pence, payable under an existing dispensation. The Revenue made the point that several staff appeared to be rounding their mileage claims. It was contended that these were, by definition, not accurate, and consequently the Revenue said that 'It cannot be said that no private fuel is provided'.
On this basis, the Revenue was seeking to assess fuel scale charges on seven individuals for the past six years. A number of points were made to the Revenue:
- The Revenue was happy that all claims were for business journeys and it did not believe that there were any claims for non-business journeys.
- It confirmed that business mileage was classed as from the place of work to the place of business or from home to the place of business if the journey was undertaken direct from home.
- It accepted that the company's policy was only to reimburse business mileage and that the company never reimbursed any private mileage.
In fact, the company was still reimbursing employees on the old triangular travel method; that is, the lower of home to place of work or the journey which would have been undertaken if the journey had started from the office.
It was also pointed out to the Revenue that a director of the company checked all expense claims independently and that if any individual were attempting to overclaim mileage, this would be pointed out to him. A final point was that an analysis of the last three months' expenses claims for the individuals concerned showed that although rounding did take place, none of the journeys could be classed as excessive. The Revenue was invited to pick one journey and undertake that journey to see if the mileage claim was too high. It declined to do so and accepted, that because the company used the old triangular travel method of reimbursement, some of the employees would be entitled to make section 198, Taxes Act 1988 claims that they were not currently making. On this basis, the Revenue agreed that no fuel scale charges were due for any employee for any year.
Common problem areas
The above illustrates some common areas that pay-as-you-earn auditors raise on a regular basis. Some of their arguments were technically incorrect and some were merely downright daft. However, without professional help, I dread to think how much tax, National Insurance, interest and penalties the company may have settled for.
Mark Morton provides lecturing and consultancy work for Mercia Group Ltd. He can be contacted on 0116 2581200, e-mail: mark.morton@mercia-group.co.uk.
