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Know Your Customer – KYC the HMRC Crackdown on Compliance

Know Your Customer – KYC the HMRC Crackdown on Compliance

HMRC has recently launched their Know Your Customer (or Key Yield Chances) campaign.

Toward the beginning of the year HMRC launched a new methodology to target Employer Compliance reviews on certain key clients/targets. In recent years HMRC have been focusing their compliance activity on single specific areas of risk e.g.:

  • Employment Status
  • Termination payments
  • Construction Industry
  • Share schemes
  • Mobility

Although successful this fragmented approach has not produced the yields required and has led HMRC towards a new compliance initiative named “Know Your Customer”

Firstly I have to commend HMRC on the name Know Your Customer. Like all of you I am a regular customer of everything from wine at Waitrose to energy from EDF. Unlike HMRC however I can’t think of any other service where I don’t have a choice who supplies this service. (let me know if you can)

What IS KYC All about?


HMRC has recruited a wide range of individuals from a variety of industries with experience and familiarity of taxation and working practices within those industries. In a kind of poacher becomes gamekeeper way, these “Compliance Champions” have started writing to large businesses (starting with the top 2000) to request a meeting as part of the KYC regime.

The letter will essentially invite you to a meeting in your offices where all the key stakeholders in your business may be required to attend. Specifically they will be looking for the key personnel from Payroll, HR, Reward, Mobility, Fleet, Payroll, Finance and Tax.

Prior to their visit they will expect you to forward copies of your policies for a wide range of areas including but not necessarily limited to:

  • Expenses and details of the process maps that support their audit
  • Benefits, any salary sacrifice communications and the process maps governing P11D completion
  • Redundancy, relocation and termination policies
  • Incentive arrangements, bonus and share plans and the processes governing tax deductions
  • International assignments and the processes for tracking short term business visitors

KYC In a nutshell…

  1. HMRC are going to write to you informing you of a visit.
  2. You need to make sure your management team and other key stakeholders are available.
  3. You will need to have all your policies and procedures in place
  4. You need to be prepared to share these.
  5. You will be questioned about policies and procedures.
  6. If these are not up to scratch or departments show lack of cohesiveness then this will be a red flag
  7. HMRC will want to investigate further if they have concerns
  8. If HMRC find issues then they may start proceedings.
  9. You may end up paying back taxes, interest or penalties if problems are uncovered.
  10. You need to be prepared

Business Mileage and Its Importance in KYC

Business mileage is a universal expense that for many organisations (when linked with fuel) is the largest single employee expense that is likely to be regularly claimed.

The claimants of business mileage in the UK range widely from the smallest business or sole trader to the largest business or public sector organisation. One area that is often forgotten is that business mileage is not necessarily related to those who drive company cars. Known as Grey Fleet, employees driving their own vehicles can dwarf company car fleets and can be particularly prevalent in certain business sectors.

When you consider other expenses and benefits there is often a clearly defined process and form to fill in (P11D/P11D(b), P9D, P46(Car) being just a few) With mileage however there is no such form. As a result the range and depth of mileage claimants in the UK is so varied there is no single universal rule for mileage claims but instead a series of recommendations and authorised payments that employers can choose to adjust slightly dependent upon individual and corporate circumstances.

In our own research we have discovered a variety of different mileage rates ranging from just 10 pence per mile to well over £1 per mile with as many as 16 distinct ways that an employee can be reimbursed for business mileage (Pay and Reclaim) or reimburse their employer for private mileage (Drive and Refund).

It is therefore no surprise that many organisations get mileage wrong and leave themselves open to scrutiny by HMRC.

Why is an efficient mileage system required and what problems are businesses facing?

Background to the Problem

The problem with rising and fluctuating fuel prices is that it increases the cost of business mileage. In the last decade the reimbursement rate for a diesel car will have more than doubled from around 7 pence per mile to around 17 pence per mile (correct at time of writing).

This increase now means is that any over/under estimation in mileage soon adds up, a trend that is sure to increase over the coming years. It is therefore essential to ensure that mileage is only reimbursed for actual miles travelled and not for overestimation.

Whilst the cost of fuel has raised, the mechanism that enables small businesses and individual users to claim business mileage (AMAP) has increased from 40ppm to 45ppm for the first 10,000 miles.


Overestimation is by far the largest problem we encounter when reviewing clients mileage processes and systems. This comes in a variety of forms, ranging from simple rounding of numbers to out and out fraud. One of the other key areas of overestimation is the use of technology such as online Mapping and directions services (Google, AA, RAC etc) to work out mileage. Google is a wonderful tool but it lacks the local knowledge you gain from living in an area. It rarely takes you through the quick shortcuts that you know so well to avoid the morning school traffic.

HMRC believes that mileage overestimation is about 25% in favour of the employee. Our own audits of customer mileage claims puts this marginally less at around 22%

HMRC Crackdown?

Politically there has been a huge thrust by the HMRC to crack down on tax anomalies and unnecessary expenses. Independent research has shown that business mileage claims are one of the single most abused areas of expenses fraud and increasingly they are being tackled by HMRC and Government. A recent study published by HMRC showed that 40% of companies would not pass a compliance review and 11% would end up with a fine.

When questioned, HMRC may say there is no crack down on mileage. Whether there is a crackdown or not there seems to be a particularly efficient process in place for uncovering inefficiencies and extracting the tax owed to them.

Tax Free Payments


The problem with overestimation of business mileage is the tax paid… well actually it is the lack of tax paid. Business mileage is generally a tax free payment therefore if you have paid an employee (or yourself) for mileage that has never been undertaken then you are essentially making a payment tax free that should have incurred tax. It’s therefore simple to understand why HMRC are all over business mileage. They want their tax back.

If you have made these payments to an employee and tax has not been paid then HMRC will request the tax and any back payments on tax for up to 6 years. What’s more they will charge interest on the tax owed and they will more than likely slap you with a penalty that could be anything from 15% to 100% of the total paid. This penalty will be based on your interactions with HMRC and how easy you make their job.

The long and short of it.


As far as Know Your Customer is concerned mileage is not the be all and end all and only makes up a fraction of the total review, it is however an important element and undoubtedly one of the area’s most difficult to get right and to properly audit. The problem with mileage is that it can very quickly become an expensive problem with payments to HMRC regularly topping more than £10,000 per driver. Also, incorrect treatment of workplaces (ie home workers going to an office with regularity) can turn previous business trips into private trips and increased yield for HMRC.

The Simple Advice


If you think you have a problem, you probably have. Get it checked out. Fleet Innovations regularly offer a free of charge audit service that will review your polices, forms and procedures to assess what potential issues may be hidden in the woodwork. The good news is that it’s not always difficult or expensive to fix. In fact a small change to the process or an additional field on the claim form could be all that it takes.

The clear message though is that you must get on top of it. If HMRC find issues within your mileage then you are opening up your business to further scrutiny. Ask yourself… Do you really want the hassle, time and disruption of opening up everything to HMRC or would it just be simpler to find out the problem and fix it? More often than not prevention is better than cure.

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About the Author

Alex Baker
"The reasonable man adapts himself to the conditions that surround him... The unreasonable man adapts surrounding conditions to himself... All progress depends on the unreasonable man."

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