What it means
HMRC was created in 2005 by merging two older bodies, the Inland Revenue and HM Customs and Excise. It is a non-ministerial government department, which means it is run by a board and professional civil servants rather than directly by a minister.
Its job is to collect the money that funds public services and to make sure that people and companies pay the right amount. For businesses, the main points of contact are payroll, corporation tax and value added tax.
Employers use Pay As You Earn to deduct income tax and national insurance from wages and send them to HMRC, usually each month. Companies file corporation tax returns on their profits, and businesses above a set size register for VAT, charging it on sales and reclaiming it on purchases.
Much of the work is now digital. Businesses file returns and make payments online, and a government programme called Making Tax Digital requires many to keep records using compatible software.
Penalties apply to late filing and late payment, and interest is charged on overdue tax, so a missed deadline has a direct cost. HMRC also has wide powers to check and investigate.
It can open enquiries into tax returns, inspect records, and charge penalties where it finds errors or deliberate evasion. Good record keeping, clear explanations of unusual items and prompt replies to its letters are the best protection.
Rates, thresholds and deadlines are set by Parliament and the tax authority and change from time to time, so always confirm current rules before relying on them. Advisers and accountants help businesses handle the details, and the authority publishes guidance and runs helplines for those who prefer to deal with it directly.
Customs duty, import VAT and border paperwork add another layer for companies that import or export goods.
In practice
Real-world examples.
Example
A small design agency registers for VAT as its sales grow. Each quarter it files a return showing VAT charged to clients and VAT paid to suppliers, then pays the difference to HMRC.
Example
A manufacturer exports goods to a customer outside the country. Its finance team completes customs declarations and checks whether duty or import VAT applies, using an agent to handle the paperwork. The agent charges a fee of $150 per shipment, which the company compares with the cost of employing its own customs specialist.
Example
An employer runs payroll for 60 staff. Each month it calculates income tax and national insurance for every employee, reports them through the payroll system and pays the total to HMRC by the due date.
Formula
Calculation
VAT payable = output VAT on sales - input VAT on purchases
Assume a VAT rate of 20% for illustration; the actual rate is set by law and can change.
Suppose a business makes sales of $500,000 excluding VAT in a quarter and buys goods and services of $300,000 excluding VAT.
Output VAT = 500,000 x 20% = $100,000.
Input VAT = 300,000 x 20% = $60,000.
VAT payable = 100,000 - 60,000 = $40,000.
If the business were late and incurred a penalty of 2% on the unpaid amount, the extra cost would be 0.02 x 40,000 = $800. The point is that VAT collected is mostly the government's money, not revenue for the business.Case study
Seen in the real world.
Cranmore Builders is a fictional construction company that received a letter from HMRC asking about the VAT treatment of a large contract. The finance manager gathered contracts, invoices and correspondence and found that she had applied the wrong rate to part of the work.
In this illustrative case, she told HMRC about the error before it was found, paid $38,000 of extra VAT with interest and explained the steps taken to prevent a repeat. Because the mistake was careless rather than deliberate and had been disclosed, the penalty was reduced. The company then introduced a second review for unusual contracts. The finance manager also scheduled a quarterly meeting with the company's tax adviser to catch issues earlier.
Watch out
Common mistakes.
- Treating VAT collected from customers as company income, when it is owed to HMRC.
- Missing deadlines because of a payment that takes days to clear, when late payment attracts penalties and interest.
- Ignoring HMRC letters, when unanswered enquiries can lead to estimates and penalties.
Questions
People also ask.
What does HMRC do?
It collects taxes, pays certain benefits and credits, enforces customs controls and regulates areas such as the minimum wage.
When was HMRC formed?
It was formed in 2005 by merging the Inland Revenue with HM Customs and Excise.
Where can I find current rates?
The official government website publishes up-to-date rates, thresholds and deadlines, and you should check it for the tax year in question.
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