An employer compliance check is HMRC testing whether a business has operated PAYE and National Insurance correctly on everything it pays its people. The usual ground covered is payroll records and returns, whether PAYE was operated on all directors’ remuneration at the right time, whether P11Ds reflect all expenses and benefits, how regularly the business pays its PAYE over, and, where relevant, compliance with the CIS sub-contractor rules and the off-payroll working legislation. Anything found is settled with interest and penalties, and the cost of your accountant handling the check is yours.

For an owner-managed company this is often the most intrusive check there is, because it reaches the directors personally: their remuneration, their expenses, their benefits and their loan accounts all sit inside its scope.

What HMRC looks at

The check works through the payroll from the records upwards. HMRC’s own guidance to its officers frames the ground as: the end of year and payroll returns, whether PAYE has been operated on all directors’ remuneration at the right time, whether P11Ds reflect all expenses and benefits provided, and the payment history, meaning whether the business remits its PAYE regularly and on time.

For construction businesses the check extends to the sub-contractor regulations, and for companies supplying the services of individuals it extends to the off-payroll working rules.

The usual pressure points

Expenses and benefits produce most of the findings. Round-sum allowances, private fuel, mixed-use assets, entertaining coded to the wrong place, and benefits provided but never returned on a P11D are the recurring themes. Directors’ loan accounts are the other reliable battleground, because a debit balance can generate both a benefit charge and a tax charge on the company.

Worker status runs both wider and deeper: one relabelled contractor is rarely one relabelled contractor, it is every engagement on the same terms, across every open year.

How settlements work

Employer compliance findings are normally gathered into a single settlement covering the tax, the National Insurance, interest and any penalties, rather than being assessed year by year. The behaviour behind the error drives the penalty: more care, less penalty, and unprompted disclosure attracts more favourable treatment than being found.

Why these checks are expensive to defend

Payroll checks are document-heavy. Several years of payroll, expenses claims, benefit records and board minutes may need to be produced and explained, and every grey area is negotiated line by line. That is professional time, billed to the business, and not recoverable from HMRC whatever the outcome.

Common questions

What records does HMRC look at in an employer compliance check?

Payroll records and returns, expenses and benefits records including P11Ds, directors’ remuneration and how PAYE was operated on it, the business’s PAYE payment history, and where relevant CIS and off-payroll working compliance.

Can HMRC look at the directors personally?

The check is into the employer’s obligations, but directors’ remuneration, expenses, benefits and loan accounts sit squarely inside that scope, so findings frequently touch the directors directly.

How far back can an employer compliance settlement go?

HMRC’s assessing time limits apply: four years in ordinary cases, six where a loss of tax was brought about carelessly, and twenty where it was deliberate.

What happens if errors are found?

The tax and National Insurance are settled with interest, normally as one settlement across the years involved, plus a penalty driven by the behaviour behind the error. Correcting a position before HMRC finds it attracts better treatment than waiting.

Does tax fee protection insurance cover an employer compliance check?

PAYE and employer compliance checks are among the categories these policies commonly cover, but wordings differ and the check must begin while cover is in force. Read the wording rather than assuming.

Related guides

This page explains HMRC employer compliance checks. It is general information, not tax advice, and it does not describe the terms of any particular insurance policy.

Solar Insurance Services (Medway) Limited is registered in England and Wales, company number 05439438, and is authorised and regulated by the Financial Conduct Authority, firm reference number 459582.

Sources: HMRC Enquiry Manual EM8250 on employer compliance; HMRC guidance on tax compliance checks; HMRC Compliance Handbook CH52100 and CH53000 on assessing time limits.