HMRC tax compliance update

Background

In 2023 HMRC carried out a review of how it engages with the housing association sector, seeking to equalise the treatment between larger and smaller organisations. Previously the largest organisations had named HMRC officers responsible for VAT and employment tax, with the rest of the sector broadly dealt with as part of the wider taxpayer population.

Under the new model, HMRC is utilising a pool of housing association specialist tax officers to deal with the sector – providing a one-stop-shop email address for VAT queries from all housing associations.

It’s not surprising that this change has been followed by a compliance campaign, which kicked off at the end of last year and has rolled out to the housing association population more widely in recent weeks. Focused primarily on VAT, it allows HMRC to build specialist sector knowledge whilst carrying out its vital compliance work.  

What is new?

For those who have dealt with HMRC mainly in the form of pre-credibility enquiries (checks when a VAT refund request is submitted), this campaign asks much more in-depth questions and shows HMRC really trying to get under the skin of the business to understand not just its VAT profile, but its core VAT accounting systems and processes.

Those with experience of the Senior Accounting Officer (SAO) regime will recognise a number of similarities, with HMRC trying to ascertain:

• The experience of staff.
• The review process for VAT return preparation.
• Internal and external audit procedures.
• The flow of information from sale or purchase through to the VAT return, with the digital links required by Making Tax Digital for VAT likely to be particularly scrutinised.

From a VAT technical perspective, there are specific questions about:

• The purchase of services from overseas; often subject to the reverse charge, with an accompanying UK VAT liability.
• Sale of staff time, likely subject to VAT.
• Cost sharing groups options to tax and partial exemption special methods.

HMRC has also expressed interest in activities that sit outside the ‘core’ rental functions of a housing association, such as childcare services and community initiatives.

What about other areas of tax?

In addition to the above, we have also seen increased activity in other areas including employment taxes. With marginal tax rates of around 90% for grossed up tax on benefits where higher rate taxpayers are involved, this has long been an area of focus, but we are seeing increasingly targeted activity.

National Minimum Wage (NMW) continues to be an area of focus, particularly for this sector. HMRC has, and is, looking at specific workers in the care industry for example, as well as workers in particular geographical areas.

It is also duty bound to review every compliant raised by an employee who is concerned that they may be paid below NMW.

A review of businesses ‘named and shamed’ in the media demonstrates that many companies you may consider to be reputable have breached the rules and it’s often as a result of a ‘technical’ matter, such as expecting employees to wear a certain colour shoes, offering the opportunity to join a savings club, or inadvertently encouraging apprentices to do a little extra reading in their own time. Remember also that if an employee claims they work extra hours unpaid, it is up to the employer to demonstrate this is not the case.

In addition to this, we are seeing a number of reviews of the off payroll labour rules – or ‘IR35’ as it is often referred.

The ‘soft landing’ approach that was applied when the rules were introduced in 2021 is now over and HMRC has recently issued updated guidance setting out their expectations of employers when looking at this area.

It covers everything from procurement, training and record keeping, to assessments, the appeals process and more. We often find this area can ‘fall between the gaps’ in finance, HR, tax and procurement, and it is important that strong processes are in place to show obligations are being met.

Travel and expenses rules are also complex, and where hybrid working is in place, there is often less clarity over whether a given location is a ‘permanent’ or ‘temporary’ workplace. HMRC has provided some updates to their guidance, but many consider there is still further work to do to fully understand the tax rules in a post-COVID environment.

Finally, we are also seeing increased activity around whether certain vehicles are vans or cars. Whilst HMRC reversed its approach to twin cab pick-ups, so that these continue to be looked at in the same way as the VAT rules, this does not apply to other vehicles. Vehicles which may have more of a ‘van look’ about them can easily be considered to be cars, substantially increasing the benefit in kind value.

What should you do?

Assuming HMRC will continue to roll out VAT and other campaigns across the sector, as well as reviewing your treatment of the types of transactions set out in the questionnaire, you may also wish to consider documenting your tax processes and procedures in a single document or file.

This should simplify HMRC’s checks as well as being a useful resource in its own right for new joiners to the finance team. Irrespective of whether a compliance visit is imminent, preparing for a review is a useful way of refreshing and testing your tax controls, processes, agreements (such as partial exemption methods) and knowledge of what is going on across your organisation.

Regarding employment taxes, there is a lot of value in reviewing the procedures in place to comply with NMW. Whilst it may still be the case that you have to settle underpayments, the naming and shaming provisions can be mitigated if dealt with before a review. 

Having an understanding of the off payroll labour working rules can also help ensure you are compliant and can make any necessary adjustments. Even having clearly identified processes with dedicated responsibility can manage risk in this area.

Finally, reviewing travel arrangements, both from an expense policy viewpoint and understanding whether your fleet comprises of cars or vans - and where the difference is - can help reporting.