As a leader in payroll and/or finance, you know that payroll is subject to HMRC rules that are complex and changeable. If your payroll system has gaps or vulnerabilities or is not as transparent as it should be, the penalties are high - in terms of cost, stress and reputation.
This blog explains the importance of benchmarking your payroll processes to ensure they are always ‘audit-friendly’ and efficiently adding value to your organisation.
Whilst a payroll audit doesn’t occur annually, and it could be years before you are inspected, it’s risky to become complacent. If tax errors are suspected or you’re late with submissions, your organisation may trigger an audit request. Suspicions payroll behaviours within your industry (not directly by your organisation) may also trigger a check.
A Check of Employer Records is likely to be the first requirement from HMRC (even for SMEs), consisting of detailed tax questions. If you cannot fully satisfy this check, then HMRC will not hesitate to launch a full Employer Compliance Review (previously called a PAYE & NIC inspection and also referred to as a PAYE audit). It’s therefore prudent to always be fully prepared.
The type of records HMRC will scrutinise include payroll records, expense claims, cashbook and petty cashbook, contracts and IR35 policy and practice. There are many grey areas that can be difficult to interpret, such as medical expenses, casual labour, paying self-employed workers, and expenses that blur the boundaries between work and home. You will be expected to meet HMRC’s demands in the required timeframes.
In a nutshell, audit-friendly payroll is compliant, transparent and well-organised. Inefficient or inaccurate record keeping causes major problems.
A visible audit trail is vital so you can easily access data from months, or even years, ago. Whether you have paper records, or data is centrally cloud-hosted (the latter is highly advisable), accountability should be clear, i.e. who worked on payroll, what changes they made, and when.
There are time limits in which to supply information to HMRC and you need to be able to access payroll data quickly - and possibly while you and your team are working remotely, as has been the case for most of this year. In an ideal world, your records will satisfy HMRC and no further action will be required. However, if your payroll is not satisfactory, the consequences can be grave and costly. It is recommended to have expert advice on hand to contest or negotiate (where possible) HMRC decisions to reduce the impact on your people and organisation.
In the case of non-compliance, discrepancies or failure to account for tax, HMRC will usually calculate the lost tax and NIC over a period of six years (or longer if they suspect that deductions have been knowingly withheld) plus the current year. Additionally, organisations face penalties and interest, depending on the circumstances including the seriousness of the discrepancy and the attitude and integrity of the employer.
HMRC can seek penalties and interest if you fail to make appropriate tax returns or claim excessive tax repayments. You will also be flagged to be audited again to check your procedures are compliant moving forwards. Audit failures can result in brand damage - internally and externally - disengaging employees and stakeholders. They are also highly stressful.
Prevention is better than cure, so payroll that is ‘in shape’ and audit-ready avoids a last-minute panic should a Check of Employer Records be sprung upon you. More mature payroll processes use automation and SaaS to save time, avoid human error and ensure the latest software (employment and tax legislation) handles complex calculations.
Investing in SaaS and automation boosts the digital transformation of your organisation, allowing teams to access systems remotely and continually. All tax-related records are securely and centrally hosted in the cloud, providing a clear digital paper trail with accountability for inspections.
Automated payroll is far more resilient, transparent and audit-friendly than ‘immature’ manual systems, eliminating problems like missing paperwork or duplicated files. With the shift to remote and mobile working, manual payroll systems are going to struggle. You risk working inefficiently and making costly payroll mistakes that lead to non-compliance and penalties.
Outsourcing your entire payroll operation to a reputable supplier is the ideal investment for peace of mind and tax compliance. It minimises risk and assures disaster recovery and back up, always keeping you in the driving seat and keeping your payroll audit-friendly.
As mentioned, your co-operation with HMRC is likely to influence a more positive outcome, so being able to supply accurate information quickly really counts. Whether to assist your negotiations or provide knowledge, 24/7 access to experts through a SaaS or outsourced payroll solution also provides peace of mind and avoids consultancy fees and further delays.
It’s advisable to review your payroll annually, in anticipation of an HMRC check or audit. Adding value to your whole organisation, efficient payroll engages employees and develops standardised processes for future growth. A solution that worked a few years ago may well be lagging behind now, especially in terms of technology.
Not only will a review uncover how you can save time and money, but it will improve compliance and reduce risks. Ultimately, it will benchmark your processes to ensure you are fully prepared for a payroll audit - and help you sail through it.
Our 10 minute assessment will give you an indication on where your organisation sits within the payroll maturity model. We'll send you a tailored report on what your rating means, and where you can improve and optimise your payroll for your team, people and wider business.
Although for many the 1st January is the start of the new tax year, for the UK it is not. However, the tradition of New Year’s Resolutions is something to think about. Where traditionally resolutions are about stopping smoking, exercising more or giving another excess up, there are some areas that the UK Payroll Professional may want to start considering.
With the holiday season right around the corner, payroll professionals have a unique set of challenges to tackle. While it’s a time for celebration, it’s also a time for careful planning to ensure employees receive their pay correctly and on time—and with all the necessary tax and benefit considerations.
Navigating the complexities of payroll and HR can be challenging, but with Payroll Question Time, you don’t have to do it alone.
This SD Worx exclusive monthly webinar is your trusted resource for staying up-to-date with the latest legislative changes, compliance strategies, and best practices in payroll management.
Each session features insights from leading experts, turning complex topics into practical advice that you can apply immediately.