How farmers can avoid mistakes in HMRC tax inspections

With HMRC under pressure to increase revenue in the face of rising government borrowing costs, many farmers are likely to get their first-ever tax inspection.

Five thousand extra inspectors will be recruited by 2029-30 – one extra for every 1,000 small businesses in the UK.

Hayley Price, a director of accountant Dyke Yaxley, says the firm is supporting several farm clients that are currently being inspected.

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“We are definitely noticing an increase in the number of tax inspections, and ultimately more officers mean more investigations.” 

In 2024-25, HMRC completed 316,000 compliance checks across all sectors.

Compliance with national minimum wage (NMW) regulations and benefits-in-kind rules are two pay as you earn (PAYE) areas where farm businesses commonly make mistakes, while farm diversification into new and emerging enterprises such as anaerobic digestion (AD) can result in VAT errors.

Hayley and fellow director Andrew Thomas also offer guidance on inspections and how to avoid mistakes.

National minimum wage

The complexity and strict application of NMW regulations often result in accidental breaches by farm employers.

However, even when non-compliance is unintentional, businesses can be fined and named and shamed by HMRC.

If staff are in a salaried role, hours worked and salary paid must correlate to ensure NMW thresholds are met.

Hayley therefore advises that employers ensure workers submit time sheets documenting hours worked, otherwise breaches can occur, especially at busy times such as harvest and lambing.

During an inspection of a fruit grower she acted for, a deduction from wages led to an accidental breach, taking the payment below the minimum wage threshold.

This resulted in HMRC imposing penalties and ordering the business to reimburse employees.

Benefits-in-kind

When an employee is provided with non-cash benefits, these may be liable for tax under P11D.

Typical benefits on a farm might include providing a vehicle – an employee must pay income tax on the value of that benefit, with the employer paying Class 1A national insurance (NI).

Rules on accommodation are more complex – if the employer pays the rent or the council tax and water charges, these aren’t taxable, but if they cover the cost of any utility bills, these are benefits-in-kind.

Accommodation isn’t taxable if it is provided on top of a salary, but if an employee sacrifices part of their gross earnings for that benefit, income tax and national insurance contributions are payable under the optional remuneration arrangements, says Andrew.

“Let your accountant know what benefits are provided so that they can advise in real time what is taxable.” 

Farmworkers defining themselves as self-employed is another area of scrutiny, he adds.

“A tax inspector will want evidence of invoices submitted by self-employed workers. If these show a regular pattern of work for most of the year for one business, HMRC will regard them as employees.”

Triggers for PAYE and VAT inspections

If a worker suspects they are being underpaid according to NMW thresholds, they can report their employer to HMRC, resulting in an inspection.

Certain sectors regarded as at higher risk of non-conformity are more likely to be inspected, including farms employing seasonal workers.

HMRC randomly selects businesses for inspection, too.

It may open a compliance check where returns appear incorrect or unusual, including where a large VAT repayment is claimed relative to turnover, or declared tax is inconsistent with business activity.

Frequency of inspections

Unless the initial breach is major, the business is no more likely to get another inspection than any other.

Future engagement depends on risk – where significant non-compliance is found, HMRC may monitor a business more closely.

But HMRC will use an inspection as an opportunity to educate a business on getting it right in future, says Hayley. “They will document the errors and will then want to move forward.”

What an inspection involves

Not all inspections are in-person, many are conducted remotely.

Most visits are arranged in advance and typically come with around seven days’ notice.

The business will likely receive written notification from HMRC of a general PAYE or VAT check, and the first step will be a phone call by the inspector to gather information.

If, during the course of inspecting the initial documentation, an error is identified, more information may be requested. For PAYE, this might include timesheets or invoices for items provided by the employer for employees.

“An accountant is permitted to attend the inspection. Although it will incur cost to the business, it can be money well spent,” says Andrew.

“Sometimes an inspector will request documents that a business is not statutorily required to produce. It is important not to be afraid to say no, and there is an element of negotiation too,” he says.

To prevent breaches, when accountants are doing the end-of-year accounts, he advises requesting them to highlight potential tax pitfalls identified or reviewing the PAYE and VAT systems for weaknesses.

Penalties

If the reason for an underpayment was careless, deliberate, or deliberate and concealed, there may be a penalty in addition to the tax being recouped.

The penalty amount can range from 0-100% of the tax underpaid, depending on the reasons, whether it was prompted by HMRC or not, and the amount of assistance given by the taxpayer.

Hayley says a business can ask for a penalty to be suspended, which can result in the penalty being scrapped if errors are not repeated. An accountant can guide businesses on minimising penalties.

Cost of an inspection

As the goal of HMRC is to recoup unpaid tax, it doesn’t charge for an investigation, but the business being investigated must meet the cost of its own professional support.

Accountants offer clients insurance for this with premiums varying according to turnover and business type – it can cost under £250 a year for a partnership, with the protection mostly covering the cost of an accountant’s time.

“Where the policy is taken out with your accountant, it is usually straightforward to claim provided the client hasn’t intentionally tried to conceal a deliberate deception,” says Hayley.