What is an HMRC employer compliance review?

Unlike a check focused on one specific issue, an employer compliance review typically looks across the whole payroll function: whether PAYE and National Insurance were correctly calculated and paid over, whether benefits-in-kind were properly reported on P11Ds or through payrolling, whether expense reimbursements met the qualifying conditions for tax-free treatment, and whether anyone treated as self-employed or engaged through a personal service company should really be an employee.

HMRC usually starts by requesting a sample period of payroll records, expense claims and contractor arrangements, then extends its questions based on what it finds. A review that starts on expenses can easily widen into a full IR35 or status review if something looks inconsistent.

Reviews can be entirely correspondence-based, but HMRC retains the right to visit business premises to inspect records under its Schedule 36 Finance Act 2008 powers, particularly for larger or higher-risk employers.

The employer's core PAYE obligations are set out in the PAYE Regulations 2003 (opens in a new tab), which require tax to be deducted at source from employment income and accounted for to HMRC through Real Time Information reporting.

National Insurance obligations run alongside PAYE under the Social Security (Contributions) Regulations 2001, and benefits-in-kind reporting is governed by the benefits code in the Income Tax (Earnings and Pensions) Act 2003.

Where the review touches on contractor arrangements, the off-payroll working rules in Chapter 10 Part 2 ITEPA 2003 come into play for medium and large employers, alongside the general IR35 rules in Chapter 8 for engagements with small clients.

Treat a request for a sample period as an opportunity to check your own compliance before HMRC does; if you find an error, correcting it voluntarily is usually treated far more favourably than HMRC finding it first.

Make sure whoever manages payroll, expenses and contractor engagements is involved directly in the review, since HMRC's questions often span several functions that do not normally talk to each other.

If HMRC's sample review uncovers an issue, expect it to ask for the same information across a longer period or the whole workforce, so be ready with a plan for that wider request.

Where errors are found, HMRC can assess unpaid PAYE and National Insurance across the review period, with interest, and this can be extended to earlier years if the same error recurred.

Penalties apply on top depending on the behaviour involved, and reviews touching multiple areas — expenses, benefits and status — can result in several separate assessments running in parallel.

Managing a wide-ranging review properly across payroll, benefits and status specialisms takes coordinated adviser input. Growth plan clients have free tax investigation insurance included, covering our fees for handling an employer compliance review — see /fees.

Do not assume a review that starts on one topic, such as expenses, will stay limited to that topic.

Do not provide records for the sample period only if HMRC later asks for a longer period; provide what is requested but be ready for the scope to expand.

Do not let different departments respond separately without coordination — inconsistent answers between payroll, HR and finance create unnecessary risk.