It is easy to overlook PAYE and other employment tax matters, but they could be costing your practice more than all the partners’ or owners’ taxes put together. It makes sense to get them right and there are some pitfalls for even the most commercial of businesses.

Can your firm say ‘yes’ to the following statements?

• Those in charge of the financial performance of their departments take commercial decisions as to what is needed in order to deliver services to clients.
• You believe in providing fee earners and other employees with the facilities they need to carry out their jobs efficiently.
• Rather than enforce a rigid and standard expenses policy, you allow fee earners to make their own commercial decisions and incur reasonable costs that their clients will pay for.
• You believe that your employees should work in an environment that shows that you value them.

If you can answer ‘yes’ to any or all of these statements, you are likely to have a strong people-focused practice, but may not necessarily have all the tax and NICs considerations under control. It is an unfortunate feature of good people management that it is most unlikely to be free of tax and national insurance. Similarly, what makes sound commercial sense may also give rise to what tax law regards as benefits in kind.

Experience of HMRC’s employer compliance reviews of large professional practices indicates that the following areas are often costly for the firm concerned. When there have been errors, the high proportion of employees who are higher rate taxpayers means that the missing tax and employer’s NICs on that tax mount up quickly. The following list is of items that all arose in a single law firm and are only a selection of the areas in which HMRC was successful in obtaining additional tax and NICs.

1. The strength of the firm was that each departmental head made financial and operational decisions based on commercial considerations. If an employee needed a flat next to the office, a car and two mobile phones to work on a hugely lucrative corporate finance deal for three months and the cost could be recovered from the client in fees, then no one thought about any benefit in kind issues. Because such items went on to client codes in the accounting system, end-of-deal parties, golf trips, spa days and gifts all vanished from the sight of anyone preparing P11Ds or looking for entertaining costs to disallow in the business tax computation.
2. The same structure meant that any attempt at imposing a one-firm HR policy on travel, subsistence etc was completely disregarded if a piece of client work merited particular outlays.
3. Department heads hired staff on whatever terms were commercially viable, so tax-free golden hellos were offered, removal costs way over the Revenue’s tax-free limit were paid and home-to-work travel was claimed by those who did not wish to move closer to the city. The in-house tax department was unaware of these special terms and so, often, was HR.
4. Self-employed consultants (with responsibility for the staff working for them) were engaged where a high-profile name was needed even though payment was by the hour and the individual had no discernible business structure and none of the responsibilities of one of the firm’s partners.
5. The culture of counting pounds rather than pence permeated to fee earners: expenses claims (recharged to clients) included what HMRC would regard as personal items: new shirts, expensive toiletries, overnight accommodation near the office, early morning taxis to the office, early returns from holiday destinations.
6. The ‘work hard, play hard’ ethos was mirrored in the firm’s subsidies for the ski trip, the soccer tour, the free bar after sports matches.
7. The firm’s smart image required all reception staff to be provided with several good-quality plain suits plus accessories, all free of charge (and theirs to keep).

And yet the firm was convinced that it did not provide any benefits in kind, other than the cars and medical benefits that went on its P11Ds. They know differently now – and have paid a high price for the lesson, including professional fees, a tax-geared penalty, interest on sums paid late and the cost of tax and NICs on employees’ tax because the firm did not feel it could go back and ask its staff for additional tax that it had failed to deal with correctly.

In some practices it is the lack of communication between fee earners and central services that leads to the under-reporting of benefits. In others it is because there is no one with the expertise to recognise all the things that HMRC staff are likely to identify and it does not make commercial sense to have a specialist of this nature on the payroll.