Most employers will assume their PAYE and payroll processes are running smoothly – that is until HMRC decides to take a closer look…
HMRC compliance checks can be triggered by a late return of a P11D form, errors in form completion, or can be carried out as standard for larger businesses every few years.
So, because a detailed examination of payroll, benefits and expenses is not a requirement of a statutory audit, many businesses choose to undertake a separate health check to improve compliance and protect themselves against unwanted penalties.
Sam Stent, Tax Advisory Partner takes a closer look at one of the more common areas of risk, and how a PAYE health check can help you to avoid any unwanted HMRC penalties.
What is a PAYE health check?
A PAYE health check is a proactive review of your business’s payroll, expenses, and benefits that identifies compliance risks at an early stage.
Completed by a third party (often an accountancy firm providing tax advisory services), the health check examines how your business manages employee payments, benefits and expenses, looks at whether your systems correctly apply HMRC rules and reviews your record keeping.
Common areas of risk include:
- Mileage and travel expense claims
- Benefit-in-kind and P11D reporting
- Employment status and off-payroll working
- Termination and redundancy payments
- Salary sacrifice or flexible benefit arrangements
Catching issues early means you can make voluntary corrections – this often reduces penalties and shows HMRC you take compliance seriously.
Mileage Policies: 1 journey – 3 different answers
One of the areas where we commonly identify problems is in relation to a business’s mileage policy.
It may be that different parts of the business implement separate policies, and these are not consistent across the company, or a company-wide policy may be vaguely worded and open to different interpretations. Either way, this can result in anomalies and inaccuracies and can result in unwanted PAYE or Class 1A NIC liabilities.
To give a better idea of how this can play out, we’ve put together some examples below of a fictional employee and her mileage claims for different journeys.
Alice is an employee of Company A and as well as going to the office (ordinary commuting), she regularly attends client meetings or events elsewhere in the region. Where Alice travels straight from her home to a ‘temporary workplace’ (e.g. a client’s premises or a networking or training venue), Alice needs to consider what mileage she can claim.
Company A’s Head Office policy says that if you are travelling from home, mileage costs should be calculated based on the shorter of:
- The distance from your normal place of work to your destination: and
- The distance from home to your destination
However, Alice’s department have told her that she should calculate her mileage costs on a slightly different basis, being the shorter of:
- The distance from your normal place of work to your destination; and
- The distance from home to your destination less your normal mileage to your place of work.
Example 1
If Alice drives directly to a client who is based 12 miles beyond her office (which is 20 miles from her home) and then straight home again:
- HMRC’s approach would be that she can claim 64 miles.
- Head Office policy is that she can claim for 24 miles.
- Department policy is that she can also claim 24 miles.
Example 2
If Alice travels from home to a meeting at a college that’s 20 miles from her home (the same distance as her commute to her office) but the college is 2 miles away from the office:
- HMRC’s approach would be that she can’t claim any mileage as this is “substantially ordinary commuting” (within 10 miles of a permanent workplace).
- Head Office Policy says that she can claim for 4 miles – the distance from her office to the college and back.
- Department policy is that she can’t claim any mileage as the distance to the destination (20) less her usual commute (20) is zero.
Example 3
So, what about a journey that’s similar in length but in a different direction?
Alice needs to make a trip for a networking event. As above, her usual commute to the office is 20 miles but she needs to travel to a location that’s 22 miles in a different direction. The distance from her office to this other location is 27 miles.
- HMRC’s approach would be that she can claim 44 miles (the 22 miles from home to the location and back as this journey is not treated as substantially ordinary commuting).
- Head Office interpretation is that she could also claim the 44 miles (as the distance from home to destination is shorter than office to the destination).
- Department policy though says she can only claim 4 miles as Alice’s usual daily mileage is only increasing from 40 miles to 44 miles.
Example 4
If the distance from her office to the destination is less than the distance from her home, Alice gets different answers again …
Her usual commute to the office is 20 miles, but she needs to go to a meeting in a town 27 miles away from home (which is 12 miles away from her office).
- HMRC’s approach here would be that she can claim 54 miles from home to the meeting and back (although it is less than 10 miles extra on her usual commute, it is in a different direction so is not substantially ordinary commuting).
- Head Office policy says that Alice can claim 24 miles (as the distance from office to destination is shorter than distance from home in this example).
- Department policy says she can only claim 14 miles (54 miles travelled less the 40 miles which she would ordinarily commute).
You can see from these examples how easy it is for mistakes to arise! And how, across a large organisation processing hundreds of claims a year, this can cause significant issues.
Why it’s worth reviewing now
HMRC’s employer compliance activity is becoming more data-driven, with increased use of Real Time Information (RTI) and expense data to identify anomalies.
A PAYE health check gives you clear, practical recommendations to strengthen your controls and make sure your business is fully compliant, leaving you confident that your payroll and expense processes stand up to scrutiny – often highlighting efficiency savings along the way.
We’re here to help
Whether you’d like a focused review of expenses and benefits or a full employer compliance check, our team can help you stay ahead of HMRC’s expectations and avoid unwanted surprises.
To find out more, contact Sam or one of the Tax team by calling 0330 058 6559 or email hello@scruttonbland.co.uk
