The ongoing changes in the HMRC approach to Employer Compliance puts even more responsibility on the employer to meet HMRC’s expectations, and failure to do so can be costly with settlement being sought, and penalties being levied. HMRC are investing heavily in training new Employer Compliance Inspectors and we have seen a signiﬁcant increase in the number of HMRC investigations. Investing the resources needed to produce a Tax Risk Register can prove a wise investment, should your business be targeted by HMRC.
Since the changes to the legislation on the 6th April 2016, instead of having P11D dispensation agreements in place to provide certainty on what expenses are liable to tax/NIC, HMRC expect employers to:
- Identify their potential risk areas;
- Have strategies in place to manage those potential risks;
- Review a sample of expenses claims on a periodic basis to evidence good internal control and governance, and;
- Update internal procedures/policies on an ongoing basis to reﬂect changes in Company and HMRC practice.
In the future, these areas will be the focus of any HMRC inspection or enquiry.
It is important to realise that a potential risk area is not necessarily an area that you are concerned about, but an area which, if proper controls were not in place, would give a PAYE tax/NIC liability.
After identifying the areas that HMRC will consider to be your main risk areas, the Company will need to demonstrate effective management of those risks. Typically this will involve having a Tax Risk Register in place for Employment Taxes which is updated regularly to manage, on an ongoing basis, the potential risk areas. It is this document that HMRC will be shown in the event of an inspection taking place.
The Tax Risk Register will evidence the processes in place for monitoring the identiﬁed risks. For example, HMRC have indicated in their guidance that they expect a sample of 10% of expenses claims to be checked every 3-6 months and the ﬁndings of those internal reviews need to be documented along with any follow up actions.
In our experience, the most effective way to ensure that a business’s Tax Risk Register is as complete and effective as possible, is to have a thorough, and preferably independent, review of the Company’s policies and processes, prior to the drafting of the initial Tax Risk Register. This ensures that all relevant potential risk areas are identiﬁed, and that any actions required to manage and demonstrate compliance are included as part of the process. The Tax Risk Register also captures current processes that are already reducing the level of perceived risk, and allows you to identify key individuals who will be responsible for managing the processes and policies going forward. This ensures that the Tax Risk Register remains a ‘live document’ and an effective tool for the business.
At Smith Cooper, we have developed a process that we call ARMS which helps our clients to Assess their potential risk, Recommend solutions to risk, Manage the process to reduce risk, and Support them in providing timely technical updates and reviews as appropriate. If you would like more information about how this process works in practice please contact us or find out more here.