Many organisations are reluctant to commission a PAYE audit or payroll risk review.

There are a variety of reasons for this. Some businesses view it as an avoidable cost, while others believe that any payroll-related issues will be identified during their annual financial audit. However, relying solely on an external audit can be a costly mistake.

A financial audit does not necessarily include a detailed review of payroll processes, PAYE procedures, expense policies, Benefits in Kind administration, or National Insurance compliance. As a result, payroll risks can remain hidden for years until they are uncovered during an HMRC compliance review.

For employers, a proactive PAYE risk assessment can provide valuable reassurance that payroll processes remain compliant and that potential issues are identified before they become expensive problems.

Why HMRC Reviews Payroll Compliance

HMRC regularly conducts payroll compliance reviews across businesses of all sizes, particularly within the SME sector.

During these reviews, HMRC will typically examine areas such as:

• Reconciliation of payroll records against Full Payment Submissions (FPS)
• Employer Payment Summary (EPS) submissions
• PAYE and National Insurance calculations
• National Minimum Wage compliance
• Employee onboarding and leaver processes
• Right to work checks
• Identity verification procedures
• Workplace pension administration
• Payroll record keeping

The purpose of these reviews is to ensure employers are operating payroll correctly and meeting their legal obligations under PAYE and National Insurance regulations.

However, HMRC’s attention isn’t limited to payroll transactions that appear on payslips.

The Areas HMRC Frequently Investigates

One of the most common misconceptions among employers is that payroll compliance only relates to payments processed through payroll. In reality, HMRC often focuses on payments, benefits, and arrangements that fall outside the standard payroll process.

These may include:

• Payments to contractors and subcontractors
• IR35 and Off-Payroll Working arrangements
• Payments made to casual workers
• Staff entertainment expenses
• Employee reward schemes
• Trivial benefits
• Flat-rate or lump-sum expense payments
• Homeworking expenses
• Business travel and commuting arrangements
• Fuel provided for private use
• Attendance at trade fairs, conferences, and non-business-related events
• Medical and healthcare expenses
• Mobile phone and home telephone costs
• Professional memberships and club subscriptions
• Clothing and uniform allowances
• Employer-provided accommodation
• Goods or services provided free of charge or at discounted rates

This list is by no means exhaustive. HMRC’s approach is based on the specific circumstances of each employer, and reviews are often tailored to the nature of the organisation and the industry in which it operates.

The Cost of Getting It Wrong

It is not uncommon for HMRC to uncover areas where tax and National Insurance Contributions (NICs) have been underpaid.

In many cases, these issues have developed over several years because procedures were never formally reviewed or because regulations changed without corresponding updates to company policies.

Where HMRC identifies a recurring error, it may:

• Recalculate the liability
• Extrapolate findings across multiple tax years
• Recover underpaid tax and NICs
• Apply interest charges
• Impose penalties

HMRC can typically review records going back several years, significantly increasing the potential cost of what may have originally been a relatively small oversight.

For many businesses, the financial impact of an HMRC review can be substantial, particularly where issues affect multiple employees or have existed for an extended period.

The Benefits of a PAYE Audit or Payroll Health Check

A PAYE audit or payroll health check allows employers to identify potential risks before HMRC does.

Rather than waiting for an enquiry or compliance review, employers can take a proactive approach and assess whether current processes remain fit for purpose.

A payroll review can help:

• Identify payroll compliance risks
• Verify that current PAYE and NIC rules are being applied correctly
• Review the treatment of expenses and Benefits in Kind
• Assess workplace pension processes
• Strengthen internal controls
• Improve record keeping
• Ensure policies reflect current legislation
• Reduce the likelihood of HMRC penalties

Perhaps most importantly, it provides peace of mind that payroll processes are operating as intended.

How PayCheck Can Help

At PayCheck, we conduct comprehensive PAYE, payroll, expenses, and Benefits in Kind reviews designed to help employers identify and address potential compliance issues.

Using a detailed review framework, we examine payroll procedures, internal controls, employee expense policies, and compliance practices to identify areas that may require attention.

Following the review, we provide a detailed report outlining:

• Areas of potential risk
• Findings from the review
• Recommendations for improvement
• Practical guidance on corrective action

This enables employers to address concerns proactively and strengthen payroll compliance before a potential HMRC inspection.

Support During HMRC Reviews

For businesses already undergoing an HMRC compliance review, support is equally important.

PayCheck can assist in reviewing HMRC findings, responding to enquiries, and providing guidance throughout the process. Where appropriate, we can also support discussions relating to potential settlements and resolution of payroll compliance matters.

Payroll compliance is becoming increasingly complex, and many payroll risks often remain hidden until an HMRC review takes place.

A PAYE audit or payroll risk review provides employers with an opportunity to identify issues early, improve processes, and reduce exposure to penalties, interest, and reputational damage.

For businesses that value compliance, good governance, and peace of mind, a proactive payroll health check is often a worthwhile investment.