HMRC's trap for employers

If HMRC picks up a mistake in the benefits and expenses returns - Forms P11D - you submit for your staff, it will usually ask you to pay the tax shortfall, plus interest and maybe penalties on top. But do you really have to agree to this?

Mistakes

The government expects business owners to be accountants, unpaid tax collectors, and law enforcers on their behalf. And if you get it wrong, they're quick to penalise you financially. That's bad enough, but the Taxman now thinks it's fair game to ask you to pay someone else's tax. What's going on?

Just a regular check-up

The Taxman is ever keener to carry out PAYE audits as they're a lucrative source of income. If he finds a mistake, albeit one made in good faith, he'll look to you, the employer, to pay the lost tax or NI. A common target is benefits-in-kind (BiK) that have been missed off Form P11D. Whilst you will owe class 1A NI (this is currently at 13.8%) on the value of the BiKs, the tax itself isn't due under PAYE, it's actually the personal liability of the employee or director payable under self-assessment. So why should you have to cough up?

The Taxman's blag

The answer to the question above is, of course, "you shouldn't". It's not your tax liability so you don't have to pay. But the Taxman has a trick up his sleeve. His ploy is to suggest that if you agree to pay the tax as well as the class 1A NI, he'll waive the eye-watering penalties he could charge you for not completing the P11Ds correctly. He does this because it's easier and cheaper for him to squeeze the money out of one employer, already on the defensive, than chase a number of employees each for their share of the tax.

The Taxman's sting

Once he's cajoled you into paying someone else's tax, he'll increase the bill by "grossing-up" the amount due.

Example. Jim missed medical insurance benefits of £200 off ten of his employees' P11Ds. They were all higher rate taxpayers so the tax lost was £800 (£200 x 10 x 40%). The Taxman says that if the employees had to pay for the benefits out of their own pockets, it would be from their taxed income. They would need £339 of gross earnings to end up with the £200 each needed. Jim now has a total bill of £1,390 before interest. Would Jim be better off accepting the penalties?

New regime

Under the new regime if the mistake was innocent, and "reasonable care" had been taken in preparing the Forms P11D, then there would be no penalty. And even if one is due, it's likely to be lower than the cost of the tax and interest.

Tip 1. Check whether penalties are actually due, don't take the Taxman's word for it. Ask him to say in writing how much and why he thinks they're payable.

Tip 2. If you're confident that the error was not due to your lack of care, tell the Taxman politely that you'll appeal to the Tax Tribunal against any penalty he levies. This is a time consuming procedure for him and may act as a deterrent.

If you would like any more information on this topic or to simply discuss your needs, contact us on 0191 386 4786 or email info@westwaters.com for a free initial meeting.

HMRC's trap for employers

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