HMRC Compliance Reviews

As we recently highlighted, HMRC have moved 300 additional Inspectors to review the status of workers in the Construction Industry with a target of collecting an extra £180m by next April. This sends out the warning signals to contractors who have not already considered this issue that they need to address this as a matter of urgency. Also from April next year they will have to declare on a monthly basis that they have considered the status of their workforce and that they are satisfied that they are indeed self-employed. The first step a contractor must take is to take advice on how to make this decision and what documentation he will need to convince HMRC that the correct decision has been made. Simply, the contractor will need a contract for services, a statement of working practices, invoices from the workers and copies of their Public Liability Insurance Certificate. These documents will give him a start in making a case for the self-employment of his workers.

It is important to understand how HMRC approaches the Status Review and how you should deal with such a review.

The first warning sign will be the receipt of a letter advising you that HMRC wishes to undertake a PAYE/CIS Employer Compliance Review. They will ask for a convenient date that they can visit your offices to review the PAYE, expenses and CIS records. They will send you a booklet setting all the records they wish to review.

You may be forgiven for believing this is a routine visit to check the numbers and that you are operating PAYE and the CIS correctly. However, the visit will normally commence with two Inspectors discussing with the director or owner of the business the background of how the company operates. They will then move on to how the workforce is recruited and if there are any tenders and or invoices. This is followed by questions concerning how the company organises the work and instructs the workforce and to what extent the contractor controls the sub-contractor. Questions regarding the possibility of the sub-contractors providing a substitute follow. The provision of equipment and materials will also be questioned. If the sub-contractor’s work is unsatisfactory the Inspector will want to know if he would be paid for rectifying the work and if he has his own Public Liability Insurance or whether he depends on the contractor’s policy.

Such an interview can last two hours and can be quite stressful for the director/owner. Some Inspectors use a standard list of approximately 90 questions! The difficulty is that the contractor does not always understand the significance of the questions particularly concerning the grey areas such as substitution, control and mutuality of obligation. The contractor originally thought he was having a general chat about PAYE/CIS and expenses but finds that a considerable amount of time is taken up with a detailed questioning regarding the sub-contractors. It is not unusual for the contractor to refer to the workers incorrectly as ‘employees’ or refer to the project manager as a ‘foreman’. Both such words can give the wrong impression that the sub-contractors are not self-employed and should have their payments subject to PAYE giving the contractor additional liability to 23.8% Class 1 National Insurance interest and penalties going back six years.

The meeting is not the end of the matter as HMRC will ask for details of say six sub-contractors and they will then write to the workers asking them for a meeting. HMRC will not point out that the meeting is purely voluntary and they will visit the worker either at his home or at the site. They will again ask a series of 60 questions designed to find out the day-to-day working practices.

Following the meeting with the sub-contractor they will write to the contractor and advise him of their decision concerning the status of his workers and should he find that they were employed and not self-employed he will enclose his calculation of the additional National Insurance interest and penalties going back over a maximum of six years. This can be quite a considerable amount. Recently a contractor with only 10 sub-contractors received a bill for £500,000!

What can we learn from analysing HMRC’s modus operandi?

• Firstly the contractor should now be considering the status of his workforce before the letter arrives.
• When the letter arrives he should take advice and let his professional advisors know immediately that a meeting has been requested.
• The meeting should be meticulously prepared for with all the relevant documentation being made available and also the standard status questions should be reviewed so that there can be no errors of interpretation.
• It is essential that your professional advisor attend the meeting to assist in indicating the significance of the questions and again ensuring no errors on interpretation arise.
• The workforce should be made aware that the HMRC will wish them to submit voluntarily to a meeting and guidance should be given. If a meeting is agreed to, a professional advisor should also be present again to ensure that there could be no misunderstandings. The pre-prepared statement of working practices can be an essential document in clarifying the position for HMRC and will assist at any such meeting.
  
  

HMRC’s Employer Compliance Reviews cannot be taken lightly as the consequences can be far reaching, potentially result in a large bill for the earlier years and significantly increased costs in future years. Great care along with professional advice should be taken immediately HMRC’s letter of intent is received.

Carl Whittaker

If you require more information please telephone the CIS helpline on 01455 852050 or contact cwhittaker@qdosconsulting.com