EM8250 - Companies: Employer Compliance

The main employer irregularities and from whom the liability is usually recovered are set out at EM8251. Broadly PAYE and NIC irregularities, including non-director benefits, are recovered by a Class 6 settlement offer with the company while director benefits are dealt with by assessment or by Class 1A settlement with the director personally, but the company will be liable to NICs on

• Primary and secondary Class 1 NICs on paying a pecuniary liability of the director.
• Class 1A NICs on car and fuel benefits for years up to and including 1999/2000.
• Class 1A NICs on practically all benefits not caught for Class 1 for 2000/2001 onwards.

Only Employer Compliance staff are authorised to obtain information formally from an employer under

• Regulation 97 Income Tax (Pay as you Earn) Regulations 2003 (for PAYE tax)
• Paragraph 26 of Schedule 4 Social Security (Contributions) Regulations 2001 (for National Insurance Contributions), and
• Regulation 51 of Income Tax (Construction Industry Scheme) Regulations 2005.

These powers provide the statutory authority for employer compliance review work. Initially, employer compliance staff limit their review to current year records for which no company or director returns have been submitted so there is no question of prejudicing a company enquiry. Where the review is extended into previous years the guidance in ECH makes it clear that employer compliance staff must confine their queries to matters relating to employer obligations. There will be some records that have been used to complete both the company and employer returns.

But, Employer compliance staff do not seek to establish the extent of any employment income by questioning the treatment of the expenditure in the accounts. So if there is a discrepancy between the accounts figure and figures in the PAYE records or returns, the employer is asked to explain the PAYE figures. As no direct questions are asked about matters shown on a CTSA return for which an open enquiry window is open, the fact that an employer compliance review has been or is being conducted will not prejudice an enquiry under FA98/Sch18/Para 24. Employer Compliance always seek clearance from the CT officer before opening an employer compliance review and should consult the CT officer where there is any doubt about the line of questioning to be followed in order to carry out their employer compliance review.

Whatever the reasons for selecting a close company return for full enquiry, a review of compliance with obligations under the PAYE and NICs regulations should always be included as part of the risk assessment of the company tax return.

The End of Year returns on forms P35, P14, P11D and P11D(b) should be examined. In particular you should consider whether PAYE has been operated on all Directors remuneration at the right time and whether P11Ds reflect all expenses and benefits of Directors and other employees. Check the payment history to see if the company makes its PAYE remittances regularly and on time as a poor payment history may be indicative of a general attitude by the company and its directors to their obligations and could be a reason, especially when combined with other unsatisfactory features, for commencing a full enquiry into the company return.

If a company enquiry is not being team-worked with Employer Compliance you should liaise with the Unit responsible for the company when employer irregularities are suspected. Together you will be able to decide who can most appropriately do the enquiry work and quantify PAYE, NICs and benefit irregularities. But you should not accompany nor assist an Employer Compliance Officer on an employer compliance review without the knowledge and agreement of the employer. An employer Class 6 recovery can be either included in a Class 1A or Class 2 company tax offer or a separate Class 6 offer can be sought for the PAYE and NICs liability. When included in the company tax offer the wording of the offer needs to be revised because NIC is not a duty. You should substitute “under the relevant Acts and Regulations” and “liabilities” as the company offer letter at ECH21615.

If the company is in the construction industry or supplies the personal services of workers you should similarly consider its compliance with the sub-contractor regulations, or the IR35 legislation. If the IR35 service company legislation applies the company is entitled to relief for the PAYE IT and NIC on the deemed payment as though remuneration had been paid on 5 April for the year of assessment. Relief can be allowed by amendment of the company tax return or as a mistake claim under PARA51/SCH18/FA98.

Any decision on the ‘status’ of workers engaged or supplied by the company should only be made by the nominated Status Officer EM1611.