Why is a payroll healthcheck needed?
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.
10 reasons why an organisation should consider a Payroll Healthcheck
- it will provide peace of mind for an organisation if it is fully compliant and, if it is not, it is better to know so it can take steps to remedy any problems.
- if an organisation knows things are wrong and does nothing about it, and the tax authorities discovers the failing, the organisation will be deemed to be careless, increasing the potential level of penalty. It is better to take the initiative.
- in-year errors may be put right during the tax year, which could prevent an incorrect return being submitted and avoid potential penalties.
- a voluntary disclosure can be made to the tax authorities of any failures discovered during the review. This may prevent the tax authorities from carrying out an Employer Compliance Review and the disruption and cost this might cause for the business.
- an organisation may have changed its procedures and processes, and no longer fully comply with the regulations, eg it may need to update its agreements with the tax authorities such as an approval notice.
- it is important to keep up to date with legislative changes to ensure full compliance.
- if an organisation has not had the tax authorities compliance review for a number of years, it may be high on the list for a visit. Organisations should also remember that the tax authorities is likely to carry out a review of its payroll procedures at some stage.
- to protect an organisation against employee fraud. A detailed review could identify areas of risk.
- The tax authorities assesses the level of risk at an organisation when deciding whether or not to carry out an Employer Compliance Review. Certain types of business, and businesses with late payments or returns or high levels of casual employees may have a higher risk profile. An organisation can be prepared for this by commissioning its own review.
How to seek help?
If you’d like a Payroll Healthcheck, contact me today to arrange a compliance check review.