PAYE Investigations

Gary Green
Gary Green
October 23, 2023

For businesses that employ staff, a PAYE investigation by HMRC is always a possibility. The purpose of these investigations is to determine whether or not the business is operating PAYE correctly. 

Pay As You Earn, or PAYE, is the tax system that is applied to company payrolls. Companies in the UK handle payroll for their employees and manage the payment of their tax and National Insurance on their behalf. 

The PAYE system collects National Insurance contributions and income tax from a company’s employees as they earn, with the employer deducting those contributions directly from their workers’ salaries before sending them on a quarterly or monthly basis to HMRC. 

While most companies are able to deal with this aspect of employing staff efficiently and correctly, there may be errors or even, potentially, deliberate fraud. Therefore, HMRC may carry out an Employer Compliance Review, also called a PAYE investigation, to ensure contractors and employers are meeting their tax obligations appropriately.

With changing legislation for taxation and employment law, updated technology, new rates and third party systems linked to employment income, like pension auto enrolment and income benefits, it is always a good idea to have a highly skilled payroll accountant handling these services on your behalf. 

What Does A PAYE Investigation Cover?

If HMRC decides to carry out a PAYE investigation of your company, they will typically need to review your records at your business premises. This will allow them the opportunity to gain a better understanding of your company while also having the chance to look closely at your records and interview your key staff members. 

Employer Compliance Reviews focus on:

  • National Insurance Contributions and Income Tax 
  • P11D forms dealing with benefits in kind
  • Workers’ statuses 
  • Inpats and expats 
  • IR35 Intermediaries Legislation
  • Salary sacrifice schemes 
  • Entertainment expenses
  • Termination payments
  • Travel expenses 
  • Vans

What Happens If HMRC Finds That NIC Or PAYE Has Been Underpaid?

In cases where HMRC finds out that National Insurance Contributions or PAYE have been underpaid, they will try to recover the underpaid amount from the contractor or employer. In some cases, HMRC may seek to also recover underpayments from subcontractors or employees. 

On average, PAYE investigations take place around every six years, but in some cases, there will be a bigger gap in between the routine inspections with no need for any concern. In cases where a business has been cause for concern in the past, or evidence has come to light that it does not apply the PAYE system correctly, checks may be carried out more frequently. 

How Do I Know If I Am Under A PAYE Investigation?

You will be informed by HMRC if your business is going to be under a PAYE investigation. That will result in you meeting with one of HMRC’s representatives at your premises. It is always wise to have your tax accountant at that meeting so that they can assist with any queries that the HMRC officer makes. Usually, HMRC will request to review all your company’s records, including all expense claims that have been made and all information about employee payrolls. 

What Happens During A PAYE Investigation?

PAYE investigations are virtually always carried out by HMRC representatives visiting the premises of the company to examine its business records and books. Usually, two officers from HMRC will be present. HMRC will also be keen to question the individuals who are actually operating your company’s PAYE system to learn exactly how the system is run and whether they are dealing correctly with all types of situations. 

HMRC will not only examine the typical payment of salaries and wages, but they will also look at how benefits and expenses are reported and recorded and whether people who are treated as being self-employed should actually be treated as an employee. They will also examine less regular transactions like redundancy payments. 

When appropriate, HMRC also checks on the operation of the CIS (Construction Industry Scheme), looking in close detail at the way in which the business is dealing with individuals who are sent to or brought from other countries temporarily. 

HMRC uses this opportunity to get information that could prove to be useful for their colleagues elsewhere in HMRC. As an example, useful information about income tax, VAT, or corporation tax may be available. It is also possible that information is found that has an impact on some employees’ personal tax matters. 

In particular, HMRC will be interested in the directors or proprietors of the company and their tax affairs. Often, PAYE investigations lead onto Company Tax investigations, personal tax investigations or VAT investigations. 

Most companies today run computerised payrolls to deal with their usual monthly or weekly payrolls. However, the details that are inputted into the system rely on the individual who is dealing with the data to interpret it correctly. This may lead to an inadvertent mistake, sometimes because junior employees who input the data do not understand the possible tax consequences. 

In 2013, Real Time Information was introduced, and this made employers face certain obligations. HMRC will also be eager to find out whether employers are correctly operating this system. 

What Do I Do If I Am Subject To A PAYE Investigation?

If your company is notified of an upcoming PAYE investigation, that is no cause for concern as long as your systems have been operating correctly. PAYE investigations are routinely carried out around every six years, so simply being informed that your business will be subject to one is nothing out of the ordinary. 

Nevertheless, it is very important to ensure that your employees’ PAYE and NIC affairs are all in order and are being handled correctly at your premises. 

If HMRC discovers that correct procedures are not being complied with, you could be issued with financial penalties or, potentially, be further subjected to a full payroll investigation. Clearly, seeking professional advice in such situations is imperative as the consequences for your business can be severe. 

The PAYE process can be very complex, and therefore it makes sense to ensure that you have a skilled accountant on board who can ensure your PAYE legal obligations are being met correctly. With an experienced professional working on your behalf, you can rest assured that any upcoming PAYE investigation will run smoothly and no issues with be raised by HMRC. 

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