HMRC have a history of entering in to fishing expeditions (for additional information) when undertaking a tax enquiry. They have frequently sent taxpayers cleverly crafted letters that sound all-knowing and threatening, but actually say very little. These fishing expeditions have now stepped up a gear.

HMRC have now started sending questionnaires to clients asking for all sorts of information. We have seen a 5-page ‘Employer Compliance Check Questionnaire’ that has been sent to employers asking for a very wide range of information including who prepares the payroll, the software used to prepare the payroll, the names of people that have been paid that are not on the payroll, whether any redundancy payments have been made, and a large amount of questions entertaining, travel allowances and loans.

We have also heard of similar questionnaires being sent to personal service companies, with HMRC fishing for information on whether the IR35 legislation could apply.

HMRC’s powers

These questionnaires pose a tricky problem. Firstly, it is worth clarifying that while HMRC are free to send these questionnaires out to taxpayers, they have no authority to enforce their completion. There are no penalties for non-compliance, and HMRC cannot compel anyone to complete them. But to think that their lack of statutory power will mean the end of the matter is somewhat hopeful. It is expected that simply ignoring these questionnaires will result in formal enquiries at some point in the future.

Completing the questionnaire also poses problems. It needs to be completed correctly: fully and honestly. If details are provided to HMRC that later transpire to be incorrect, incomplete or misleading it is anticipated that HMRC will use the answers as evidence that there was an intention to evade tax, rather than honest mistakes being made. If HMRC can show this, it may put them in a strong position to charge significant penalties. The strength of such an assertion is debateable, but it is an argument that is best avoided.

Practically speaking, this leaves us with a final option: taking action of some sort.

Action to be taken

It is suggested that the HMRC’s letters be taken as an opportunity to review PAYE processes. A mixture of the changing tax landscape and evolving working practices mean that there are inevitably improvements that could be made to ensure strict compliance with the PAYE regulations, and commercial and tax efficiency.

We have contacted our insurers and they have advised that completion of the questionnaires is covered by investigation insurance, so any companies that have taken out insurance need not worry about these questionnaires.

If you receive one of these letters from HMRC, please do not complete it yourself. Please forward this onto us for advice. In the meantime, it is recommended that enquiry insurance be taken out.