PAYE Healthcheck – Compliance Review
Why are HMRC undertaking PAYE compliance reviews and what does it mean to you as an employer or contractor?
There are ever increasing pressures on businesses and their owners and this means an employer’s focus may not always be on their systems and processes around payroll, expenses and benefits.
Therefore, taking the time to step away from how things have always been done and going back to basics is essential.
HMRC are stepping up their compliance activity. The tax gap is currently around £35bn and HMRC has to close this. When 46% of the tax gap relates to errors, failure to take reasonable care or legal interpretation, it shows how easy it is to make a mistake and to get things wrong.
When HMRC do undertake an employer compliance review, also known as a PAYE investigation, it is to ensure that employers and contractors are meeting all of their obligations in relation to their employees and subcontractors.
The employer compliance review is usually conducted at the employer’s premises, to enable a discussion to be held with key personnel within the company and to undertake a review of all the prime records.
HMRC will often focus on the following areas:
- Operation of PAYE and national insurance (NI)
- Operation of payments to subcontractors under construction industry scheme (CIS)
- Reporting of benefits in kind on form P11D e.g. accommodation and beneficial loans
- The status of workers – especially any worker paid off-payroll and non-executive directors
- The correct treatment of entertainment expenses
- Off-payroll workers and the operation of IR35
- Termination payments, especially following the introduction of the post employment notice pay (PENP)
- Travel expenses including business mileage and subsistence
- Company cars, vans and fuel
- Employees entering or leaving the UK
- Salary sacrifice arrangements and their compliance for certain schemes following the optional remuneration arrangement (OpRA) legislation.
If HMRC establish a liability to tax or NI, the amount owing will also include interest on any late duties and potentially a monetary penalty based on a percentage of the tax and/or NI due.
Obviously, the best way to handle an employer compliance review is to ensure your PAYE tax and NI with your systems and processes is right in the first place and importantly that you keep records to show this.
However, we know how complex the legislation is and how easy it is to make genuine mistakes.
Employers should consider a PAYE healthcheck every few years. If you’re doing something wrong in the current year, you have the chance to rectify this before the tax year ends so that it is taxed and reported correctly. If you have made mistakes in previous years, it is better to notify HMRC of these mistakes than letting them find the mistakes themselves; by doing this it might help to mitigate and reduce any penalties.
What is a PAYE healthcheck and what are the objectives?
A PAYE tax, national insurance healthcheck is a comprehensive review of your policies, procedures and practices, to ensure your systems are robust and culminates in purposeful and practical recommendations.
The objectives of the healthcheck are to:
1) Review the:
- Payroll, expenses/benefits and any staff incentive procedures to ensure compliance with current legislation
- Procedures and documentation for workers coming to the UK, in particular short term business visitors or going overseas to work
- Background information and current issues relating to the employment status of any off- payroll worker
- All related systems and processes relating to employment tax
- Review National Minimum Wage (NMW), where required. HMRC would not consider these as part of a typical employer compliance review but often they can lead to separate reviews being carried out by HMRC on NMW as they often share the facts with their NMW team
- Where applicable, review construction industry scheme (CIS) – compliance and identifying companies that are deemed contractors under the scheme
2) Highlight any areas which may raise concern;
3) Ensure that HMRC’s business expense exemption can be applied
4) Apply (if applicable) for a PAYE settlement agreement (PSA) for items that will not be included on P11Ds or covered by an HMRC exemption or concession or if applicable, review any existing PSA to identify any potential refunds
5) Identify any areas of potential exposure and corrective action needed
6) Identify any areas where there are planning or cost saving opportunities and more tax efficient processes could be introduced. This is often a key area for the review and helps focus on the systems and processes that are in place and the improvements that can be made.
Summary findings of a PAYE healthcheck
We are able to produce a final detailed report, which would summarise the actions you need to take. The report would highlight both the risks and opportunities. The healthcheck might mean a disclosure is needed to HMRC, but as previously mentioned by doing this it might help to mitigate and reduce any penalties.