A real-life example of a PAYE audit handled badly

May 13, 2013 2013


Client confidentiality prevents us from sharing most things with others, especially on t'internet. However, we came across a blog posting by a charity the other day moaning about their experience of a PAYE audit by HMRC which we felt compelled to reply to and which we thought would be a good blog topic of our own.

The charity's blog can be found here which we thought was a highly honest account and one which many organisations would have shied away from giving publicly as it is not human nature to openly admit mistakes.

To quote the charity, it cost them £39,000 in out-of pocket costs to rectify things internally and with HMRC and another £15,000 to £25,000 in director's time costs in dealing with the audit and negotiations with HMRC which lasted for over 2 years. That's a heck of a cost and wasted time to any business, not least a not-for-profit organisation which will need all the financial help they can get.

The charity have listed a number of learning points they have taken from this experience but, in our view, there are more fundamental points of note here for other businesses to take heed of.

1) Poor record keeping is NEVER helpful - and there's no excuse for it

HMRC officers are like kids in a sweetie shop when they come to do an audit and the records are poor or non existent. Basically this gives them carte blanche to a) assume taxable payments have been made and b) to think of a random (usually way too excessive) number in assessing the extra tax/NI due by the business for non compliance with the PAYE rules and it is very difficult to recover from this without any form of proof or evidence.. The charity clearly fell into this trap hook, line and sinker in a number of the issues HMRC identified but you have to ask yourself WHY a charity of all organisations, did not keep sufficient paperwork to account for every single penny being spent ?!

2) It IS possible to fight back against HMRC - and win !

We have commented many times before that HMRC are not always right and can be extremely wrong when suggesting something is taxable in the context of a PAYE audit. It really frustrates us that there are employers out there like this charity who end up paying a sizeable settlement to HMRC where there is a huge question mark around the legality of the assessments made, Many of HMRC's technical views in the charity's case seem to us to be dubious at the very least based on the limited information available. The charity should have had proper representation from someone like Optimum PAYE during these discussions and fought back. Sadly, like many employers, the charity didn't seem to be getting the right kind of advice from their advisors on this and probably ended up paying far too much to HMRC.

3) Employers, stop being naive !!

This charity, like so many other businesses, clearly thought that tax laws are all about common sense when deciding how to treat staff payments. They really need to get with the programme, otherwise HMRC are going to continue having a field day when doing PAYE audits. Employers really need to grasp that:

a) Common sense doesn't really come into play in many areas of PAYE and employment taxes. The legislation is over complicated and seldom sensible but it is what it is.

b) As we have said before, if something sounds to good to be true then it usually is. Did the charity here REALLY believe that taking cash out of a business to offset personal mortgage costs could REALLY be a free tax "wheeze"  ??

c) Know the rules ! Or, know someone who knows the rules and can keep you right. Working in the dark, i.e. in ignorance of the many wonderful rules we have in the world of staff payments, is complete madness and a recipe for disaster as this charity found out to their cost.

4) Not-for-profits and public sector bodies are as fair game as any corporate ! No special treatment from HMRC just because of the sector you are in. And quite right too. In our experience, the not-for-profit sector has just as many non compliant businesses as the corporate world, and often much more in reality.


We hope this blog hasn't turned into a rant, it is hard not to get on one's soapbox about these things, but we thought this would be worth sharing to demonstrate how failing to address PAYE properly can be costly for any business, no matter what shape or size it is.

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