New Year, new rules - same taxman

We all make resolutions at this time of the year and it seems that regardless of the current government, compliance is high on the taxman’s resolutions list. Wasn't this the same as the year, or years, before?

HM Revenue & Customs (HMRC) have made it known that compliance is an area they will tackle to ensure that all taxpayers and businesses pay the correct amount of tax at the correct time.

Recent years have seen the rise in P11D dispensations (effectively an agreement with HMRC that certain business expenses can be paid without recording the details on a P11D benefit form), which HMRC seem happy to encourage. Every five or six years, the tax authority even writes to businesses to ask if they want to update the form.

A small number of businesses in the contract marketplace have seen the opportunity to obtain dispensations for expenses that may not be business related. Either way, these businesses will often produce the dispensation as "written evidence" that the scheme/ expense payments have been "verified" by HMRC. As with most things in life, attention is in the detail.

The dispensation is only HMRC confirming certain payments are business related.

For example, a software engineer (working through his own limited company) who is genuinely home-based and travels to a number of different clients throughout the country will generally be able to claim travel and subsistence (T&S) payments. However, if the same engineer had a three year contract at the same client and did all his work at the clients, then HMRC would be very likely to contend that the client is his normal place of work and any T&S payments would be considered private. Even if the engineer had a dispensation covering T&S payments, HMRC will challenge the payments as they can only be paid to workers away from their normal place of work. It follows that a written dispensation would offer no protection in this example and HMRC would very likely go back a number of years to recover tax, National Insurance, interest and penalties.

Other areas of interest to HMRC’s compliance teams include Holiday Pay schemes. Originally confined to the Construction Industry, these schemes popped up on HMRC's radar when large retailers began applying for the scheme for their retail staff. Hence why HMRC have already taken steps to close this loophole, and this week identified holiday pay schemes as a particular area of non-compliance.

Anyone in doubt that the taxman doesn’t transcend governments needs to look only as far as the restaurant and entertainment industry. The industry’s staff were paid tips which employers used to ‘top up’ their wages to meet the National Minimum Wage (NMW). Generally the worker would be paid below the NMW and then topped up from a ‘tips pool’ to meet the limit, similar to what HMRC says “many” umbrellas are doing today. But again, the department took steps to close this loophole.

So, what should businesses (umbrella and employment companies with travel schemes) do in response to HMRC’s promised clampdown? The simple answer is to review their current dispensation to ensure that it is correct and any expense payments are genuinely business-related. This should be done as a matter of urgency, because HMRC are likely to only wait until after 19 May (the deadline for employers to submit their forms P35 Annual Employers Declaration forms for 2010/11) before starting any compliance visits based on the new NMW regulations.

Ray McMahon is a former Inland Revenue inspector, and a tax specialist for Consultant365.

Jan 06, 2011