One of the services Westbury offers is a wide-ranging review of our clients’ compliance with the Pay As You Earn (“PAYE”) regulations. However, experience tells us that this is one of our least-used services, even though the costs of getting it wrong can be significant. So why is this? Well, one obvious answer for the low take-up is that Westbury provides payroll services for many clients who are not necessarily sold on the idea of a review by Westbury of a payroll function administered by…Westbury! Perfectly understandable, of course, but this is not really what the healthcheck is for and it seems that many clients don’t know the whole story.
The idea of the healthcheck is to anticipate the problems that can be thrown up by a compliance check from HM Revenue & Customs. Part of such a check will involve a review of the mechanics of the PAYE system and, if Westbury runs the payroll, our clients would reasonably expect that this has been done properly. However, once this aspect is complete, HMRC will move on to an in-depth review of the client’s books and records and this is frequently where most problems will be found. What HMRC will be looking for will include, not exhaustively, the following:
- Status – are all of your suppliers of services genuinely self-employed, or do you have any regular workers (cleaners are a favourite target) who should be on the payroll?
- Forms P11D – have all benefits and expenses payments been correctly reported on forms P11D and has Class 1A NICs been correctly charged on these items?
- Expenses – is the payment or reimbursement of expenses properly controlled and are all expenses correctly categorized (e.g. no charging staff entertaining to client entertaining)?
- If the employer is a company, have accurate directors’ loan accounts been written up so that any overdrawn balances are dealt with appropriately?
- If advantage has been taken of any exemptions or concessions, are the conditions for the exemption/concession still met? A typical example would be the £150 per head allowed for an annual function, such as a Christmas party. If the spend is £151 per head, the whole lot is taxable, not just the excess over £150.
HMRC’s own manuals, at COG905080, state that the compliance check should include an:
“…examination of an appropriate amount of records to confirm that the systems and controls operate in the manner described by the employer/contractor and whether they succeed in enabling him to meet his statutory obligations, including tracing transactions through the relevant systems as evidence”.
It is pretty clear, then, that the checks that will be performed by HMRC go far beyond the simple operation of PAYE to employees’ earnings. But it is not just in avoiding trouble that a PAYE healthcheck can help. Quite often, employers make life more difficult for themselves by not taking advantage of all of the options open to them and we can use the healthcheck as an opportunity to address these. For example, a dispensation can remove the obligation to report many types of expenses payments from the P11D. And if an employee gets a tax bill because he or she receives a particular benefit , the employer may be able to clear the liability directly via a PAYE settlement agreement (“PSA”), so that the goodwill created by providing the benefit is not immediately lost. If you’re unfamiliar with dispensations or PSAs, ask your Westbury partner for advice, because it’s about time you did know!
In summary, there is a lot more to a PAYE healthcheck that just PAYE and that prevention is always better than a cure!
Please contact us to find out about more about getting a PAYE healthcheck.