Revenue adopts risk-based approach to PAYE audits
Following a report originally issued by the Revenue at the end of 2001 it appears that their approach to Employer Compliance Reviews (PAYE audits) is changing. The Revenue is now adopting a risk based approach with reviews concentrating on major risks.
In order to focus on the major risks, Employer Compliance Officers are expected to gain a better understanding of the business under review. They hope to achieve this by means of an early discussion with the proprietor of the business (known as a "talk through"). The Revenue hopes that this approach will meet the wishes of employers by making enquiries more focussed, concentrating on major risks and reducing the length of the enquiry.
It is too early to know how this might impact on freelancers working through their own service company. Nevertheless it is a development that needs to be monitored carefully as experience over the last three years has shown that PAYE compliance reviews can be the first step in an IR35 challenge.
However, it raises an issue about whether clients should be encouraged to be present at such compliance reviews? It has been the recommended policy of firms like Qdos Consulting for freelancers not to be present at the review but to leave it in the hands of experts. This is seen as a prudent precaution that ensures that taxpayers cannot be 'ambushed' by the Revenue asking leading questions.
Steve Greenwell, the Director at Qdos responsible for managing Qdos's tax consultants, confirmed that, in his view, they would still advise a freelancer to leave the matter in Qdos's hands or the freelancer's accountants if they were happy to handle this and not to attend the review. This might make the review slightly longer for the Revenue but it means that the freelancer can insist on having any queries put in writing.
Given that their accountants or tax advisers usually deal with their company payroll anyway it makes sense for the adviser to handle the initial meeting. It also means that the freelancer does not have to spend the best part of a day attending the review.
In addition, in Steve Greenwell's view, there is a vast difference even between a typical one man company – which usually operates from home and whose records can usually fit into one cardboard box - and a small company that might employ several people in its own offices and which will have significantly more payroll and expense issues for the Revenue to grasp and address.
When Qdos handles a review for a freelancer they make sure that they have a good understanding of the freelancer's operations and, in particular, their contracts, so they can anticipate and plan for any problem areas.
Another change that has recently been announced is that the Revenue has given way to pressure from tax advisers and announced that they will, in future, inform tax advisers in advance when they intend to carry out a PAYE compliance visit to one of their clients.
Steve Greenwell, confirmed that this decision was as a result of pressure from local 'working together' committees – where tax advisers meet with senior local Revenue officers to discuss practical issues relating to the day to day conduct of tax compliance matters. Steve, who sits on his local 'working together' committee, confirmed that an edict recently came down from the Revenue's Head office to say that where the adviser holds a form 64-8 (New) and handles "all aspects of the employer's affairs" then the Revenue will notify the adviser at the same time as they inform the employer of the impending review.
Qdos confirmed that compliance reviews can be stressful events for tax-payers and anything that makes it more likely that the tax-payer will be assisted by an experienced adviser is welcome. Many freelancers use accountants who are experienced at handling such reviews. Often the accountant also handles the company's payroll so they have much of the information that will be needed. Accountants will frequently handle the review for the client at a reasonably nominal cost or subscribers.
Steve Greenwell advises freelancers to consider sooner rather than later whether they would want their own accountant to handle the review or whether they might want to use the services of a specialist like Qdos. If the latter then they should ensure that their accountant is kept in the picture so that they know to inform Qdos as soon as a review is planned. This will help to ensure that Qdos and the accountant liaise together with the freelancer to ensure that everything is ready and that any likely problem issues can be anticipated.
Kevin Miller, MA FCA