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During a routine PAYE visit the Inspector also took an interest in your petty cash records. He's now written asking you to supply the full names and addresses of "any suppliers you have paid in cash". How should you handle this request?

PAYE visits. Surely this is not a PAYE matter as the payments are for purchases not wages? Ultimately the purpose of the inspection is to determine that all payments to employees and directors have been taxed, NI accounted for and all payments controlled within the PAYE records. Apart from using payroll records to do this, visiting officers will also look at records, which would have been used to prepare the business accounts. Petty cash records are a favourite of theirs.

Suppliers' addresses. The most likely reason for a PAYE Inspector asking for the full address is that he suspects a bonus payment has been made to employees or the owner of the business. Suspicious mind? Yes, he likes to think that your suppliers don't want to be traced because they're under-declaring their income, or the cash is not actually being used to purchase stock. If you can, supply the addresses to make the issue go away. If your suppliers are trying to cheat the Taxman that's their problem.

No real power. However, the PAYE Inspector does not have the power to demand this information, this is the province of an Inspector enquiring into the tax return of the business. Let's say you have the information the Taxman wants but you don't want to implicate your customers, suppliers etc. What tactics can you adopt?

Comparison. Consider the cash payments made in a scrap metal business, where anyone and everyone can bring along their old unwanted metal for instant cash - including the vicar with a sizeable chunk of lead following the church restoration. Cash payments are carefully recorded but not always backed up with names and addresses. This is quite common in such trades. Another example is the high street jeweller. Put this "common practice" scenario to the Taxman as your argument for not having full details on suppliers.

Proposal. If, as a matter of course, you obtain a signed receipt (but not always an address) for cash purchases, offer to provide the Taxman with, say, signed receipts from your suppliers for a typical month as evidence of these "expenses".

Go on the offensive. If the PAYE Inspector still insists this isn't good enough, go on the offensive. Ask him the precise reason for his question "to whom were such cash payments made?" After checking, point out that (1) it was not covered in the opening letter spelling out the purpose of the visit, and (2) it is definitely not covered in the Taxman's Code of Practice 3 - Reviews of Employers' and Contractors' Records. Further, stare in your letter that these are bona fide payments for stock in trade and ask him outright if he is "on a fishing expedition?". This should focus his mind.

Beyond the PAYE pond. Regulation 55 of the Income Tax (Employments) Regulations SI 1993 does not allow the PAYE Inspector simply to ask for an analysis of items within the tax return of the business. Such matters have to be formally dealt with by his Schedule D (business profits) colleague as an enquiry into that return. It's likely that no such enquiry will follow within the normal time limit. But if it did your records and audit trail for purchases/sales would satisfy any competent Inspector that the cash expenses relate to stock

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This web-site was last updated on 29/07/2008

Specialist Dental Accountants for over 27 years.

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