You hired a couple of individuals to tidy and clear part of your premises. They’ve completed the job and asked to be paid in cash. The receipt they gave was handwritten on a piece of paper. Might this cause trouble with HMRC? Kenny Logan from the Edinburgh office looks at this in more detail.
Employed or self-employed
Whilst HMRC inspections are relatively rare, in the event of one the tax officer is likely to look closely at your business’s petty cash account. Among other things they will look for payments that might be wages and therefore ought to be corresponding with payroll records. If you have little or no information about who you’re paying, HMRC’s usual approach is to assume the worst and assume you’ve not complied with the PAYE rules.
If paying very short-term workers, consider if the terms of their work would make them an employee. If so, put their pay through the payroll system if you pay them an agreed cash sum.
Even if an individual who has worked for you isn’t an employee, HMRC expects you to keep records to a standard that means the nature of all transactions can be checked. Failing to operate PAYE is always a primary target for HMRC.
HMRC has limited power to say when you should keep documents and, in some situations, what form they should take, e.g., PAYE and construction industry scheme (CIS) records. For VAT it has the power to impose special record keeping conditions, but these don’t apply to other taxes.
For all tax purposes you can store copies of invoices, receipts, etc. in electronic format, e.g., as PDFs. These can be stored on your computer or in the cloud.
Certain documents must be kept in their original form, either on paper or as an exact replica, e.g., a scanned image. Broadly, documents in this category are those which are evidence of tax deducted such as CIS statements or P60s.
Unless you’re required to keep the original documents or copies it’s OK just to record details of transactions. In practice you’ll probably want the documents for your own benefit, especially for business transactions. But you could just keep details of what appeared on the original paperwork instead. HMRC can’t object to this.
Lack of information
Returning to the question posed at the beginning of this article. It’s a matter for you and the supplier how they are paid – HMRC doesn’t get a say. But if you want to avoid trouble ensure you have at least basic information about the person, i.e., their name and address. You should also ask them for a written (manuscript or electronic) receipt or invoice. However, the lack of such does not, as some tax inspectors would have you believe, prevent your business from claiming a tax deduction.
There’s no requirement to have a document for each and every transaction unless it’s of a type mentioned earlier, but to avoid trouble with HMRC over cash payments, make a record of the supplier’s name and address, plus the usual information: date, amount, nature of transaction, gross amount, VAT (if applicable) and net amount.
HMRC can pay particular attention to checking cash payments made to individuals for their services. It is looking for avoidance of PAYE and NI where the individual could be a casual employee. Make sure that you have a record of their name and address plus the usual information you would keep for purchases.
If you would like further advice do get in touch with JRW to fully discuss the implications