PAYE Compliance Check: A Complete UK Guide

A PAYE compliance check examines whether an employer has correctly operated payroll, and it commonly looks at three areas together: whether tax and National Insurance have been calculated correctly on pay and benefits, whether expenses and benefits-in-kind have been reported and taxed appropriately, and whether individuals treated as self-employed or contracted through personal service companies have been correctly classified under the off-payroll working rules. Where HMRC concludes that PAYE has been under-deducted, it can raise a determination under Regulation 80 of the Income Tax (PAYE) Regulations 2003 to recover the shortfall directly from the employer, which is why employment status and expense-reporting questions are treated seriously even when the amounts involved look modest at first.

The review usually starts with a request for payroll records, Real Time Information submissions, expense policies, and contracts for any workers engaged outside standard PAYE, and HMRC may also ask to interview relevant staff or visit the business to understand how pay and benefits are actually administered in practice, as distinct from what policy documents describe. A well-prepared response reconciles the payroll records to the RTI submissions and the year-end figures before HMRC's questions are answered, since discrepancies discovered mid-enquiry tend to prompt broader requests rather than narrower ones. Genuine errors identified during a PAYE check can usually be corrected through the appropriate payroll correction process, and a proactive, organised disclosure is generally viewed more favourably than information extracted piecemeal over several rounds of correspondence.

Where an employer also engages subcontractors under the Construction Industry Scheme (CIS), a PAYE compliance check often extends to checking compliance with the Income Tax (Construction Industry Scheme) Regulations 2005 alongside standard PAYE rules. HMRC will typically check that subcontractors were verified before payment, that the correct deduction rate — 0%, 20% or 30% depending on verification status — was applied, and that monthly CIS300 returns reconcile with the payments actually made. Getting a subcontractor's employment status wrong, by treating someone as self-employed under CIS when they are functioning as an employee, can trigger significant backdated PAYE and National Insurance liabilities, which is why CIS and employment status questions are so often examined together in construction-sector compliance checks.

Where a PAYE check progresses beyond a records request, HMRC may ask to hold a meeting with the business, either to discuss specific findings or to understand how payroll processes work in practice. These meetings aren't compulsory in the way that some information requests are, but declining without good reason can sometimes prolong the check, since HMRC may simply ask more detailed written questions instead. A PAYE check can conclude in several ways: no changes required, an agreed correction processed through the normal payroll adjustment routes, or, where HMRC believes tax has been under-deducted, a formal Regulation 80 determination. Employers who identify and correct genuine errors proactively during the check, rather than waiting for HMRC's findings, are generally in a stronger position when it comes to any associated penalty.