A payroll healthcheck is a review of an employer’s payroll and benefits in kind procedures to ensure that they are delivering the right results in terms of compliance with the tax authorities' rules on income tax and social security on employees’ pay, expenses and benefits. It is designed to minimise the risk of interest and penalties and to improve compliance.

Some organisations shy away from the idea of having a Payroll tax and Social Security contributions risk review as it is often seen as being an unnecessary cost. Other organisations take the view that if there are problems with their payroll and benefit procedures, these will surely be identified by their auditors as part of the annual audit process. However, a detailed examination of the client’s payroll, benefits and expenses is not a requirement of an audit. Therefore employers should not assume that a lack of comment from their auditors must mean that their payroll procedures are in order.

Although a major item of expenditure for most organisations in the profit and loss account, the payroll itself is unlikely to be the source of any major discrepancies from a tax or Social Security perspective. Once an item is included in the payroll, more often than not the appropriate deductions will be accounted for and any errors are likely to be insignificant and certainly not material for audit purposes. Of course, this does not prevent the payroll from being a major source of employee fraud, which a Payroll healthcheck may help uncover, as it should identify flaws in processes that could allow fictitious employees to be included on the payroll or for payments to continue to be made to employees who have left.

Some of the problems that create the greatest risk are often not on the payroll. Workers paid gross on a self-employed basis, expense payments that prove to be taxable and benefits in kind not included on the relevant returns are just some of the areas that can have a damaging and costly effect for any business.

Whilst it is understandable that employers make mistakes, given the complexity and ever changing legislation, the potential for interest and penalties to be added to any tax or Social Security contributions unpaid, means that such errors can be very costly for any business.

Many organisations are concerned that the commissioning of such a risk review will uncover liabilities that will have to be disclosed to the tax authorities. Should irregularities be discovered then the employer must put them right and this might include a disclosure of liabilities for earlier periods. However, the employer can mitigate the extent of any penalties charged by taking the initiative and making an unprompted disclosure to the tax authorities if this is appropriate. A full and comprehensive disclosure of any irregularities may prevent the need for the tax authorities visit and the disruptions that this can cause.