HMRC inspections: what you need to know
HMRC tax compliance can be complex for businesses of any size or industry, especially when it comes to balancing effective VAT reclamation against the risk of compliance breaches. H M Revenue and Customs (HMRC) has been tasked with raising billions of pounds extra without increasing taxes, which has caused a dramatic rise in Employer Compliance Reviews – and employee expenses are one of the first places they’ll investigate.
Small and medium employers (SMEs) are most at risk right now: many have never been audited, are unprepared, or lack any sort of expenses process, leading to significant crackdowns and fines. In 2016-2017 alone, these brought in an extra £3.4bn in tax.
The risk of being caught out by HMRC can be immense. Over 99% of visits uncover discrepancies, and a single incorrect claim considered to be due to an organisation’s culture can result in hefty financial penalties. This can seriously affect a business’ profitability and existence, so it’s no surprise that the British Chamber of Commerce (BCC) found that around 75% of companies believe the overall burden of tax compliance and administration has increased in the last five years, and 64% say that VAT creates one of the biggest administration burdens.
Many companies choose not to claim VAT on expenses at all to avoid the complications that come with HMRC reviews. This may seem like a safe bet, but businesses can lose out on thousands of pounds by sitting on the fence. We’ve been working with a medium sized company, who identified they’ve been missing out on £70,000 of VAT reclamation every quarter through fear of claiming incorrectly. Over three years, this builds up to a whopping £840,000 in lost reclamation.
Getting HMRC compliance right can lead to huge savings, so you can avoid fines and have more confidence in reclaiming VAT. The good news is that advances in technology mean you can effectively manage your internal processes to ensure they’re compliant.
What should you expect from a HMRC audit?
To cut down on manpower-intensive routine site visits, HMRC now only initially request copies of companies’ benefits and expenses policies to review.
Reviews usually occur once every six years but could lapse to between 10 and 15 years. If your company has had difficulties in the past, then this might be more frequent – occurring as often as every three years. They may also decide to pick on organisations at random, so it’s always best to be on your toes.
The policies you provide are checked for any irregularities in expenses reimbursement which could then lead to a full review of your organisation. There are several triggers which could cause this, including years of unprofitability, late submission of P35 forms or regular mistakes on returns.
If HMRC chooses to do a full audit of your company, an Employer Compliance Officer will first call you to arrange a date for this to happen. They’ll then send a confirmation letter, which usually requests copies of specific records, like expense claims or payroll records. Make sure you document which records you’re asked for and provide these within 20 days of their visit.
The officer will be looking at elements such as complete and correct PAYE calculations, correct treatments of new and old employees, and expense payments and employee benefits. You should have professional representation present at your audit because they’ll know more precisely what HMRC will be looking for in their review.
If anything is wrong, the officer should immediately explain these issues to you once the review is complete and provide information on how you can remedy these. They may also arrange to make another visit if the inaccuracies they find are significant.
The best-case scenario at this point is that the officer will ask your company to put more checks and procedures in place. However, they may decide to multiply any VAT overclaims by the number of expense claims a company has had since its last audit, which could have been six years ago. The penalty you receive will be calculated to account for the extent of information provided, how helpful you were with the process and the seriousness of issues found.
You’re entitled to a formal explanation of the figures calculated and if you disagree with the findings, you’ll be given the opportunity to dispute these. If you do agree to their decision (which is unusual) then you can make a payment on the account immediately to avoid interest.
What can you do to prepare?
As an audit can happen at any time, it’s always best to be prepared in the first place. This is key to your success, and there are many working parts involved in this.
There are two main things you can do to make sure you’re prepared:
- Implement an effective expenses policy
- Automate your expenses process
Abiding by these means your employees comply with not only your expectations but HMRC’s too. This helps maximise VAT recovery while minimising any worry of breaches.
Keep reading for some of our top tips on making sure you’re ready for an audit.
Implement effective policies and approvals
Having an expenses policy is the cornerstone of HMRC compliance. Good policies should clearly state what can and can’t be reimbursed. This includes cost limitations and reimbursement rules which affect all claims.
Your approvals process should also be included in your expenses policy, so claimants can see the route their claim will take to be reviewed, who will authorise it, and when and how it will be reimbursed to them.
Having a policy won’t just help you stay safe in an audit. Employees will understand your expectations and know exactly where they stand with claims. It can also positively impact your business’ culture, reducing conflicts relating to unapproved expense items, time spent checking and approving expenses, and issues relating to the time it takes to be paid.
This is all made simple with an automated expenses solution. Policies can be visible on desktop and mobile, so employees can visit them for absolute clarity whenever they’re claiming expenses.
Once a claim is logged, it can be routed automatically to the approvers to review on their smartphone, tablet or desktop.
A digital system can also automatically find and flag expenses that don’t fall under your policy, such as claims that are over allowance, so approvers can identify this and find out any relevant reasoning which could affect authorisation.
You should also include best practices for claimants in your policy, so claims are compliant when they’re initially made. You can find more advice on our best practice recommendations in our full guide.
Use checks and controls on claims
Checks need to be carried out on every single claim to make sure they’re all correctly categorised. An incorrect claim could spell big penalties: if you can’t prove that a claim played a legitimate role in the conduction of business, the fine could be over £100,000.
These checks can be very manual and time-consuming for an approver but are a necessary part of the claims process, so automating this process with a digital solution can be a huge time-saver. Digital expenses processes can ask employees simple questions when they make a claim to ensure there’s plenty of information for determining whether it’s legitimate.
They can also flag claims outside policy, and check VAT numbers on a receipt to ensure a claim is legitimate and compliant. VAT compliance always needs to be recorded, otherwise, you may not be able to reclaim full VAT on an expense.
Keep all documentation
In order to effectively prepare for an audit, ensure you have evidence for each claim as well as a legitimate reason for every expense item. This could include receipts, purchase order numbers or travel bookings.
It’s crucially important to keep all VAT receipts you receive, which should include a clear time and date. Any images of these should be clear without any obstructions (such as fingers) if possible, which may cover up important parts of the receipt.
Many companies choose a digital, cloud-based solution to make keeping documentation much easier. This is a paperless process, so avoids the hassle of filing lots of receipts. Instead, you can get claimants to take photos of their receipts which reduces the risk of anything getting lost, or duplicate claims being made. Your approvals process will also be captured, which makes it very easy to identify the reason for a claim.
HMRC Employer Compliance Reviews can happen at any time, and the complexities of meeting their high expectations are daunting for many companies. But by ensuring you’ve got clear policies in place and adopting a digital expenses solution, you can minimise the risk of compliance breaches and feel confident in claiming VAT on employee expenses.
These are just a few of our tips for ensuring you’re ready for a review, but there’s plenty more to this complex topic which can help you be successful. For more information and guidance, please read our full guide to HMRC reviews.