Employment tax has definitely come of age. Once considered as the Cinderella of taxes, its profile has increased amongst companies to the extent that it threatens to overshadow its Big Sister corporation tax.
The reason for this is not difficult to find. In the last year corporation tax brought in approximately £47 billion for the Exchequer whereas employment taxes, income tax and national insurance over 200 billion. Indeed there are three taxes which bring in the large amounts upon which government depends; income tax; national insurance; and VAT.
Since the 1980s, governments have found it increasingly difficult to increase the amounts of corporation tax that they collect as a proportion of GDP. There is a fear of companies moving their operations to more tax friendly climates. The same fear does not appear to have permeated the minds of government regarding employment taxes whose scope, complexity and scale seem to increase each year.
In order to protect the government’s revenues, HMRC, have a sophisticated program in order to check, audit, review and investigate companies. With a top tax rate of 45% +12% employee national insurance and 13.8% employer’s national insurance there is plenty of incentive for deep investigations of a company’s treatment of its pay, benefits, expenses.
The variety of areas covered by employment taxation make it very complex to deal with. These include:
- the operation of payroll- in particular a companies adherence to statutory maternity pay, sick pay, with minimum wage and the new real-time information requirements.
- Benefits – this includes how the information is collected and reported
- expenses how these are reported – what tax is settled on them and whether the authorisation process is robust
- termination payments- there is the well-known £30,000 exemption from income tax. It is less well known that there is a complete exemption from National Insurance as a result this area is constantly policed by HMRC
- employment status if a company has lots of contractors from whom they do not deduct tax, the revenue may conduct exhaustive investigations into whether this is justified
- there are a significant number of annual returns required – reporting pay benefits and the operation of share schemes which require some skill in completion but can also be subject to audit by HMRC at any time
- the rules regarding ex-patriots are regularly being tightened in reaction to perceived avoidance and evasion. Ex-patriots are particularly difficult to deal with because they often require interaction between two or three different tax regimes.
How we can help?
Investigations are both time-consuming and also potentially very costly. From our 20 years experience of these type of investigations, we can offer a tailored service to your need. One element would be a preventative one which undertook a mock PAYE audit investigation to determine whether there were areas which require changes in procedures before this becomes very expensive.
An alternative service that we can provide is that when there has been investigation, we can advise you on trying to settle it as quickly and cheaply as possible.
The very large scope of employment taxes often involves many different departments such as finance, facilities, HR, line managers, IT as well as potentially the Board, this has become even more high profile with the introduction of the senior accounting officer (SAO) rules which make the senior accounting officer personally responsible for the compliance record of their company. Significant fines could follow a compliance failure as well as damage to reputation, extra tax, penalties, and interest.
More generally the government believes it has identified a tax gap between the revenues it collects and those it feels it should be able to collect. It is putting more effort into both grading companies according to their risk level and also concentrating on non-compliance with heavy penalties as a deterrent. Companies should make sure that they are not the unwilling volunteers to fill this tax gap.