What can HMRC ask you about your workers?

Your business might have an unblemished tax record, but HMRC’s interest doesn’t necessarily end there. These days it’s just as likely to ask questions about your workers. How should you respond?

Special forces
In 2009 and 2010 HMRC succeeded in persuading the government to beef up the powers it has for carrying out investigations. These didn’t just enhance the existing rules, it resulted in a complete overhaul. What’s more, it doesn’t just affect the way tax inspectors check up on you and your business. You can now face requests for information about employees and others that do work for you, such as contractors and other businesses.

Legal limits
HMRC doesn’t have free rein to demand what it likes, though we’ve come across a few tax inspectors who think differently. But the law does give it a lot of scope. It says HMRC can ask for “something that is reasonably required where it could affect a person’s tax position now or in the future” . While HMRC is most likely to use this right in respect of your workers, it can also ask about your business contacts, such as customers.

Is a request reasonable?
“Reasonably required” means HMRC has a duty to get the balance right between the trouble a request puts you to and how important it is for it to have the information. It accepts this would exclude you from having to repeat all the information you gained from hearsay; in any event it doesn’t usually give this much weight.

Tip. You can refuse a request for information relating to an employee or other party that would take you too much time or anything that would cost you any more than a trivial sum to provide.

Employee information
Your main defence against complying with a request from HMRC is if the information about an employee is personal in nature, i.e. relates to their physical, mental or spiritual welfare. However, this raises a possible problem if your personnel records are combined or overlap with financial data. This will leave you with a question over whether to allow HMRC access to documents. This goes hand in hand with your legal obligation to protect personal data that you hold.

Data protection
Personal information you hold about someone else, e.g. an employee, is covered by the Data Protection Act 1998 (DPA). This says that you must keep it private, even from government departments. This seems at odds with HMRC’s powers to ask for information that, while relating to a tax investigation, is nevertheless personal. We therefore asked HMRC to justify its position.

Trap. HMRC has authority to obtain information from employees that’s necessary for its investigations. It is a legally enforceable right and the DPA permits employers who keep information of a personal nature to divulge it to HMRC. It’s not up to you to worry about how it uses it.

Tip. Always ask HMRC to put all requests for information about an employee etc. in writing. This will give you protection from your employees and the Information Commissioner in the event you’re challenged over the right to provide it. HMRC doesn’t have to explain the powers it’s using for this type of request as they are automatically implied.

HMRC has a right to demand information from you about your workers and anyone else linked to your business. While the Data Protection Act means personal information must be kept confidential, a request from HMRC trumps this. To protect yourself insist that the request is put in writing.