Written by Paul Chappell on January 6, 2020
Top PAYE issues uncovered by HMRC compliance visits

HMRC’s Employer Compliance officers undertake many thousands of PAYE inspections in any 12 month period. Although HMRC will state that the main purpose of the review is to police the system the main reason is to bring additional money into the Exchequer.

Such reviews tend to highlight the same types of errors, whatever the trade of the business or organisation may be.

So what are the top 10 areas that provide HMRC with the most yield and how can employers ensure that they are fully compliant should HMRC knock on the door?

1) Employment Status

This affects workers engaged on a self-employed basis providing labour only.

HMRC look at the terms of engagement and if they deem that the worker was engaged in terms that are similar to, or exactly the same as, employees HMRC will calculate the PAYE Tax and National Insurance Contributions that should have been taxed as an employee. Typical examples in education are music teachers working say 1 day per week.

What this means for you …

Many employers automatically assume that because they have an invoice from the worker that this protects them from a status review. This could not be further from the truth. Undertake status reviews now, don’t wait for HMRC to come calling. HMRC’s new Check Employment Status Tool (CEST) here will assist in making an informed decision on the employment status of any worker.

2) Off –Payroll Intermediaries

This currently applies to the public sector, however from 6 April 2020 will also affect the private sector and is employment status, in a different guise.

Historically a director running his or her own company as the only director was required to ascertain whether they would have been an employee of the engaging company, but for the protection of their own Limited Company.

What this means for you …

The responsibility now lies with the engager to check the ‘employment status’. If the engager gets this wrong, they will be responsible for the payment of the Tax and NIC to HMRC. Undertake reviews on off-payroll workers before HMRC do so.

If an engaging company have gone through the correct processes but in HMRC eyes have arrived at the incorrect outcome, the company would not be penalised by HMRC. Within the Public Sector, from 6 April 2020, you will be required to provide the worker with a copy of the determination that you have made of the employment status. The CEST tool should be used as part of this process. The worker will have 45 days in which to appeal to you if they do not agree with the assessment

3) Termination payments

Despite the £30,000 exemption being around for many years, there is much mis-understanding of the tax free rules and therefore a very lucrative area for HMRC.

What this means for you …

6 April 2018 also brought about a change of legislation affecting Pay in Lieu of Notice (PILONs). All PILON’s are now chargeable to Income Tax and National Insurance whether they are contractual or not.

6 April 2020 also brings into charge a new Employers National Insurance liability on termination payments over £30000. The exemption for employees’ tax and NIC in respect of the £30000 exemption remain unchanged.

4) Personal Mobile Phone Allowances

Many employers provide monthly round sum allowances to employees to cover costs incurred by those employees using their personal mobile telephones for business purposes. However the full allowance is considered to be income and must be processed through the payroll.

What this means for you …

HMRC will only allowance actual calls that can be identified as business. The issue with a mobile telephone contract is it is personal to the employee. Most contracts cover lines rental, internet access, all calls and all texts. There is no additional cost incurred by the employee in using the telephone for business related purposes. An employer provided mobile phone, for business and personal use, has no tax consequences whatsoever. Quite an incentive for employees if an employer feels particularly generous!

5) Company Vans

A benefit in kind arises if a van is made available for the private use. For tax purposes, private use of a van does not include home to work travel.

What this means for you …

It is not sufficient for an employer to simply state that the only private use is home to work. There must be documentary evidence in the form of mileage logs or trackers. Where there is no evidence, HMRC will charge a full van and van fuel benefit.

The last couple of years has seen a concerted attack by HMRC on crew cabs. These are similar to double cab pick-ups, but with the outward appearance of a traditional van. Because of the second row of seats, HMRC are arguing that the principle purpose of construction is for the carrying of people not goods, and it is therefore a car. Cars carry a far higher benefit in kind charge, hence HMRC interest in such vehicles

6) Company Car Fuel

The increased tax charge on company cars and fuel over the last few years has resulted in the provision of fuel being withdrawn, a car benefit only is declared on form P11D.

What this means for you …

This very much attracts HMRC’s attention because a fuel benefit is chargeable if £1 of fuel is provided to an employee for private use. Fuel benefit is an ‘all or nothing’ charge. It is recommended that employees are not provided with any fuel by the employer, a mileage claims are submitted by the employees’ and mileage claimed in accordance with HMRC’s Advisory Fuel Rates here.

7) Casual Employees

With the advent of Real Time Information PAYE reporting, the use of casual employees has diminished.

What this means for you

If there is a PAYE scheme in operation, casual employees must be reported through the payroll to HMRC. Failure to do so will result in HMRC charging the PAYE that should have been deducted.

8) Round sum or un-receipted expenses

Employers can reimburse expenses incurred by employees that have been incurred wholly, exclusively and necessarily in the performance of the duties of employment.

What this means for you …

As the payments are made without deduction, HMRC pay particular attention to the payments to verify that they meet the tax free criteria. If there are any short comings in the information held by the employer, HMRC which charge PAYE and NIC on the payments.

9) Staff functions

HMRC will not charge Income Tax on an annual function (such as Christmas party) if all employees are invited, whether they attend or not, and the cost per head does not exceed £150. Excellent news for employers and employees alike to celebrate a successful year.

What this means for you …

It is a common mis-conception that only amounts over £150 are chargeable. This is not correct. If the amount exceeds £150, if only by a few pence, HMRC will charge Income Tax and NIC on the full amount of the function.

10) Trivial Benefits

It is more and more common for employers to provide employees with small valued gifts. HMRC have deemed that as long as the gifts are not in cash, or a cash voucher (store cards are allowable), gifts up to the value of £50 can be made to employees without tax and NIC consequences.

What this means for you …

Unfortunately there is much confusion amongst HMRC officers regarding Trivial Benefits. It is important to note that the £50 allowance is not an annual allowance. You can provide as many trivial benefits in a tax year as you like without tax and NIC consequences, as long as the benefit meets the criteria, not cash and not a cash vouchers. This can be quite an incentive for staff. What about staff barbeques through the summer? As long each individual barbeque does not exceed £50 per head, no problems!

Much food for thought (particularly the BBQ’s)!

For more details or information on HMRC enquiries contact Paul Chappell Head of Legislation and Compliance at Dataplan Education on 03331 123456 or email 

Paul has worked with Dataplan since 2016 as part of our commitment to being at the forefront of payroll legislation and compliance.

We tempted Paul over from the ‘dark side’ where he was a Tax Inspector for HMRC and managed a team of 12 PAYE investigators. After all who better to understand the demands of HMRC than an ex Tax Inspector? Since leaving HMRC, he has successfully represented clients when HMRC undertake PAYE and tax investigations.