Q. I have been informed that from next April H M Revenue & Customs (HMRC) will have new powers that will enable them to demand securities from businesses operating Pay As You Earn (PAYE) schemes. Is this correct and if so how much will the securities be and how will HMRC levy them?
A. From 6 April 2012 HMRC will be able to ask employers to pay a security where there is serious perceived risk that they won’t pay over their PAYE tax deductions or Class 1 National Insurance contributions (NICs).
This new legislation should not affect the vast majority of employers who pay their tax on time and in full. And it won’t be used for employers who are having genuine financial problems. HMRC advise that any business facing genuine financial difficulties including meeting any tax liability should contact the Business Payment Support Service, who may be able to help them.
HMRC have stated that businesses have repeatedly told them that they resent the unfair advantage gained by those who don’t meet their tax obligations. HMRC have stated they are determined to pursue those who won’t pay, to make tax fairer for all and these latest measures are part of HMRC’s continuing drive.
HMRC can already ask for a security for VAT, insurance premium tax (IPT) and environmental taxes. HMRC have found they are effective – statistics show that in around half the cases the trader becomes and remains compliant after receiving the first warning letter.
The required security will usually be either a cash deposit from the business or director - held by HMRC or paid into a joint HMRC/taxpayer bank account - or a bond from an approved financial institution which is payable on demand.
It is HMRC intention to target the use of securities to tackle the handful of employers who deliberately try to defraud the government. These are employers who in the main deliberately choose not to pay or have no qualms about building up large PAYE or NICs debts, including penalties. A growing trend has seen companies engage in phoenixism. This is where a business evades tax by becoming insolvent and then sets up a new company the next day to continue trading thus avoiding its liability. Securities may also be used where businesses do not respond to HMRC’s attempts to contact them thus raising concerns as to its reliability.
These employers who HMRC perceive to fall into the above categories will have deducted money from employees’ pay packets under PAYE and the pretext of paying their employees’ income tax and NICs. It is not their money to use. HMRC will calculate the amount of the security on a case by case basis - depending on the amount of tax at risk, the previous behavior of the employer and other risks.
Those being required to pay a security can appeal against this decision if they wish. The standard appeal procedures for all direct taxes apply. However as is currently the case with VAT, if an employer fails to provide the security for PAYE or NICs, HMRC can prosecute them. The sanction is financial in the form of a fine and not a custodial sentence.
If you need any further help or information then please call our tax advice service on 01455 852550 who will be able to assist you.