PAYE Employer Compliance Review: What HMRC Checks and Why

A PAYE employer compliance review examines whether an employer has correctly operated PAYE across payroll, benefits in kind and expenses under Part 11 ITEPA 2003. It typically covers whether tax and National Insurance were deducted at the right time, whether benefits such as company cars, medical cover or loans were reported on P11Ds, and whether reimbursed expenses were properly exempt or should have been taxed.

The review can be triggered by a routine risk-based selection, an inconsistency HMRC noticed between company accounts and payroll filings, a whistleblower report, or a sector-wide campaign. The opening letter should state the tax years and areas under review, though HMRC can extend scope where it finds unexpected issues during the check.

Common triggers include company accounts showing car, loan or subscription costs that do not appear on any P11D, a mismatch between real-time information submissions and other HMRC data, or a director drawing benefits without any benefit being reported at all. HMRC also runs targeted campaigns focused on particular sectors or benefit types where error rates have historically been high.

Being selected does not mean HMRC believes deliberate wrongdoing has occurred. Many reviews are resolved once records are reconciled and any genuine oversight is corrected, but a poorly evidenced response can turn a routine check into a longer dispute.

P11Ds report benefits in kind provided to employees and directors that are not payrolled, and the employer separately reports Class 1A National Insurance on the P11D(b). HMRC checks whether every benefit shown in the accounts, such as private medical insurance, company cars or beneficial loans, has been correctly valued and reported, and whether any exemption claimed genuinely applies.

Dispensations, now largely replaced by exemptions for qualifying business expenses, allowed certain reimbursed costs to be paid without reporting. HMRC will test whether the exemption conditions were actually met at the time, not simply whether a dispensation was once granted, since an old dispensation does not cover expenses that no longer qualify.

HMRC can request information and documents reasonably required to check the PAYE position, including payroll records, expense claims, mileage logs, contracts, board minutes and bank records, using Schedule 36 FA 2008 powers if correspondence does not resolve matters. A visit to inspect records on site is also possible, though not compulsory in every case.

You can question a request that seems disproportionate to the stated scope, and clarify ambiguous questions before providing a large volume of unindexed material. A well-organised response that reconciles figures to the return tends to close a review faster than an unstructured document dump.

Where HMRC finds that expenses or benefits were under-reported, it can raise a determination for unpaid tax and Class 1A National Insurance, charge interest, and consider a penalty under Schedule 24 FA 2007 depending on the behaviour involved. Genuine administrative errors corrected promptly are treated differently from deliberate under-reporting.

HMRC may also propose a settlement covering multiple tax years using a agreed methodology rather than testing every individual case, particularly for widespread but low-value errors such as minor expense misclassifications. Any settlement should be checked carefully before it is accepted.

Keeping contemporaneous expense policies, mileage records and benefit valuations makes it far easier to demonstrate that PAYE was operated correctly when HMRC asks. Reviewing benefits and expenses annually, rather than only when a review starts, reduces the risk of a systemic error running across several tax years.

Where an error is found before HMRC raises it, a voluntary disclosure can improve the penalty position compared with waiting for HMRC to discover the same issue during the review. Cooperating fully, providing accurate reconciliations and correcting the position going forward all support a lower penalty outcome.