You will have to forgive me if I do not go into the technical details of the points that were disputed – to do so might identify the business involved, and in any case, this article is not about the technicalities (fascinating though some of them were, including studying a tax case heard in the previous century involving payments to Scotland Yard detectives!).
An “Employer Compliance Enquiry” involves two main aspects. The “Employer Compliance Officer” (ECO) will check that the PAYE regulations have been properly applied to payments to employees – in the case of larger employers like the one I was dealing with, this is mostly done electronically, by interrogating the payroll software. The ECO will also look at expenses payments and benefits in kind provided to employees to ensure that these are properly reported and taxed.
My client has a very competent accounts department and they took the view that they could handle this apparently routine enquiry without my help. I was not so sure, but the customer is always right so I contented myself with warning them to check with me before they agreed any additional tax was due.
The PAYE side of things went fairly well. Apart from a few slip-ups (inevitable in the case of a large payroll), there was only one significant mistake which was largely due to a weakness in the proprietary software the client used for their payroll. So far, so good, and we put our hands up and paid the tax due.
It was when the Enquiry turned to expenses and benefits that things got ugly. The ECO homed in on two main issues: travelling expenses and accommodation provided for employees. Her letter to the client asserted that tax was due on most of the travelling expenses and nearly all of the accommodation, and required the client to provide her with details for the last six years so that she could calculate how much tax was due. The biggest problem was the accommodation – the tax at stake was in the hundreds of thousands of pounds when you looked back over six years.
The ECO’s letter simply asserted that the tax was due. Asked why, she quoted from HMRC’s instruction manuals, not from the legislation itself. Now, although HMRC’s manuals are generally quite good at summarising the law, they are not in fact the law and in some cases they generalise too much. My client’s circumstances were very unusual and were not covered by the manual.
The client rang me up and asked me to look at the assertions the ECO was making about what was taxable. To cut a long story short, after a spirited exchange of letters and “referring the matter to my Head Office” from the ECO, she eventually agreed that none of the accommodation was taxable and that a large slice of the travelling expenses were also free of tax.
I do not tell this story to brag about how good I am at tax (though I reckon I’m pretty good!), but to draw attention to a serious problem with the way the tax legislation is enforced. ECOs are not experts in the finer points of tax legislation – witness the fact that most of my arguments had to be “referred to Head Office” – but this does not stop them from looking at a situation and demanding tax based on a generalised overview of how the legislation works. I remember that culture from when I was a Tax Inspector – at an early stage in my training, I was told “if in doubt, disallow the expense or say the payment is taxable and let them try to argue it’s not”.
The problem is that revenue officers these days present themselves to their “customer” (their own ridiculous word to describe the person they’re seeking to tax!) as being fair and neutral – “we only want to make sure you pay the correct amount of tax”. For some inexplicable reason, people still tend to think that government officials know what they are doing and believe they would not demand money unless it was due. They are wrong. A revenue officer, confronted with something that may or may not be taxable, will work on the basis of claiming tax and letting the “customer” make the running if they disagree.
Of course, in many cases they are right, but never assume they are without taking expert advice. Most of all, remember that they are not on your side – I am not advocating that you behave in a hostile manner, just that you take proper advice before you accept what they tell you. When I am acting for a client, I really am on their side, because they really are my “customer”. Revenue officials now also call you a “customer” – if he could talk, my cat might as well call the local mice his “customers”!