PAYE investigations and employer compliance reviews
When HMRC reviews a payroll, it looks beyond the payslips: benefits, termination payments, contractors and the minimum wage. What it finds can reach the directors personally.
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If HMRC has already issued a determination, decision or penalty, the window to appeal is short: normally 30 days from the date it was issued, and 28 days for a minimum wage notice of underpayment.
What an employer compliance review is
An employer compliance review, sometimes called a PAYE audit, is HMRC checking how a business has run its payroll. HMRC’s own guidance describes its Employer Compliance officers reviewing the records of employers and contractors to check two things: that PAYE, National Insurance and the Construction Industry Scheme are being operated properly, and that expenses and benefits are being returned fully and accurately.
It is not the same as an enquiry into a tax return. There is no Section 9A notice and no single return under review. The check is on how payroll has worked in practice, and it can look across several years.
How a review starts and runs
A review can begin with a letter or a telephone call asking for records, sometimes with a proposal to visit. If HMRC telephones, you can ask for contact to be in writing. HMRC says it visits only where it thinks a visit is necessary, and that visits are normally arranged by agreement, with at least seven days’ notice.
Requests can cover payroll reports, expenses and benefits, expense claims, and the contracts and invoices for anyone paid outside the payroll. PAYE records must be kept for at least three years from the end of the tax year they relate to. Minimum wage records created since 1 April 2021 must be kept for at least six. HMRC may ask to speak to the people who keep the payroll and finance records, or to workers whose employment status is under review. If you would rather staff did not know about a visit, you can tell HMRC.
Behind the requests sit formal powers. Under Schedule 36 to the Finance Act 2008, HMRC can give a written notice requiring information or documents reasonably required to check a tax position, and can inspect business premises, assets and documents for the same purpose. A notice can usually be appealed within 30 days of being given, but there is no appeal against a requirement to produce statutory records — the records the law already obliges a business to keep. You are entitled to have an adviser deal with HMRC for you throughout.
What a review can cover
- Expenses and benefits. Whether benefits have been reported, on forms P11D or through payroll, and the Class 1A National Insurance on them accounted for. Reporting is changing: payrolling of benefits is due to become mandatory in phases from 6 April 2027, starting with company cars, car fuel, vans, van fuel and employer-provided medical benefits.
- Termination payments. A payment within the termination payment rules counts as employment income only to the extent it exceeds £30,000. Post-employment notice pay, the part that stands in for notice not worked, is taxed as earnings and gets no benefit from that threshold. The split between the two needs to be right.
- Workers treated as self-employed. Whether people paid on invoice should have been on the payroll, including anyone engaged through their own company.
- Directors. Benefits, loans and any tax the company has met on a director’s behalf, which can affect the director personally.
Minimum wage compliance is checked under its own legislation, set out below.
Employment status and off-payroll working (IR35)
Employment status is decided on the facts of each engagement. HMRC’s Employment Status Manual works through factors drawn from case law: control, personal service and the right to send a substitute, mutuality of obligation, financial risk, and whether the worker is part and parcel of the organisation. What the contract says matters, and so does how the work is actually done.
If an employment status enquiry concludes that someone paid as self-employed was an employee, the tax and National Insurance that should have been deducted is normally pursued from the business as their employer.
Where a worker provides services through their own company or another intermediary, the off-payroll working rules decide whether they are taxed broadly as an employee would be. In an IR35 investigation, the first question is which version applies, and that depends on the client:
| Client | Who decides status | Who accounts for the tax |
|---|---|---|
| Small, or without a UK connection, and not a public authority (Chapter 8, ITEPA 2003) | The worker’s own company or other intermediary | The intermediary, which is treated as making a deemed employment payment to the worker |
| A public authority, or medium or large with a UK connection (Chapter 10, ITEPA 2003) | The client, which must give a status determination statement with its reasons and take reasonable care | The deemed employer, normally the party that pays the worker’s company; the client, if it has given no statement or did not take reasonable care |
Under Chapter 10, if the worker disagrees with a determination, the client has 45 days to respond. Broadly, a company client is medium or large if it exceeds two of three Companies Act size tests (turnover, balance sheet total and more than 50 employees) for two consecutive financial years. The turnover and balance sheet limits rose for financial years beginning on or after 6 April 2025; HMRC’s guidance indicates that, for a usual 12-month year, the earliest tax year the change can affect is 2027-28.
Two newer rules matter in a review. Since 6 April 2024, where HMRC pursues a deemed employer for a Chapter 10 liability, it can set off tax and National Insurance already paid on the same income by the worker and their company. And for payments from 6 April 2026, where workers are supplied through an umbrella company, the agency that contracts with the client — or the client, if there is no agency — is jointly and severally liable for PAYE the umbrella company does not pay.
HMRC’s Check employment status for tax (CEST) tool gives HMRC’s view based on the answers entered. HMRC says it will stand by a result as long as the information given remains accurate and the tool is used in line with its guidance. The result is only as reliable as the answers behind it.
National Minimum Wage checks
Minimum wage enforcement changed hands in April 2026. The Fair Work Agency, set up under the Employment Rights Act 2025, now holds statutory responsibility for it. HMRC still carries out the checks, under a contract with the Agency, and a full transfer of the work to the Agency is planned from April 2027. A check can follow a worker’s complaint or a targeted investigation, and no reason needs to be given for an inspection.
Where underpayment is found, the officer can give a notice of underpayment. It requires the arrears to be paid to the workers, calculated at the current minimum wage rate rather than the rate in force at the time, and normally carries a penalty:
- 200% of the arrears, capped at £20,000 for each worker, with a minimum of £100 per notice
- payable within 28 days, but treated as paid in full if the arrears and at least half the penalty are paid within 14 days
- covering underpayments up to six years before the day the notice is given
- open to appeal to an employment tribunal within 28 days, beginning with the day the notice is given
Where an employer finds and correctly repays all the arrears before an investigation starts, the Agency’s enforcement statement says a notice should ordinarily not be issued. Employers who receive a notice may also be named publicly. The current threshold for naming is total arrears of £500 or more, with a lower figure for repeat cases. Representations against naming must arrive within 14 days. Failing to pay the minimum wage can be a criminal offence, and so can intentionally obstructing a check.
How HMRC collects underpaid PAYE and National Insurance
At the end of a review, HMRC either issues formal decision notices or agrees a contract settlement. Where nothing is agreed, it uses separate statutory tools for tax and for National Insurance, because a regulation 80 determination recovers tax only:
| What HMRC issues | What it covers | How to challenge it |
|---|---|---|
| Regulation 80 determination (Income Tax (PAYE) Regulations 2003) | PAYE tax HMRC considers the employer should have paid, estimated to the best of its judgement; it can cover classes of employees without naming them | Written appeal within 30 days of the date the notice was issued |
| Section 8 decision (Social Security Contributions (Transfer of Functions, etc.) Act 1999) | National Insurance contributions, and questions such as whether someone was an employed earner | Written appeal within 30 days of the date notice of the decision was issued |
| Penalty notice | Inaccuracy, late filing and late payment penalties | Appeal normally within 30 days of HMRC’s letter |
| Notice of underpayment (Employment Rights Act 2025) | Minimum wage arrears owed to workers, and a penalty | Appeal to an employment tribunal within 28 days, beginning with the day the notice is given |
A regulation 80 determination is treated as an assessment, so the ordinary time limits apply: four years after the end of the tax year, six where the underpayment was careless, and up to twenty where it was deliberate. Outside the four-year limit, HMRC’s own guidance says the onus is on HMRC to show the understatement was careless or deliberate. Once an appeal is made, it can be settled by agreement, put to a statutory review by an HMRC officer not involved in the decision, or taken to the tribunal.
PAYE penalties
Inaccuracies. A return for PAYE purposes falls within the inaccuracy penalty rules in Schedule 24 to the Finance Act 2007, and HMRC applies the same rules to Class 1 and Class 1A National Insurance. The penalty is a percentage of the potential lost revenue: up to 30% for a careless inaccuracy, 70% for a deliberate one and 100% where it was deliberate and concealed. It reduces for the quality of disclosure, to lower minimums where the disclosure was unprompted. No penalty is due where reasonable care was taken, and a penalty for a careless inaccuracy can be suspended for up to two years against conditions. Our guide to careless and deliberate penalties sets out the ranges in full.
Late filing. A Full Payment Submission is due on or before payday. A late one can bring a monthly penalty of £100 to £400, depending on the number of employees in the scheme. The first late month in each tax year is not penalised, and HMRC issues these penalties quarterly.
Late payment. The first late PAYE payment in a tax year does not count as a default. After that, a penalty of 1% to 4% of the late amount applies, rising with the number of defaults in the year, and a further 5% applies to amounts still unpaid after six months, and again after twelve. If a business cannot pay what a review finds in one go, our guide to Time to Pay arrangements explains how instalments are agreed.
Construction Industry Scheme checks
HMRC inspects contractors’ records in the same way as employers’ PAYE records. A contractor must verify subcontractors, make deductions where required, check whether a subcontractor should really be an employee, and file a monthly return by the 19th, including a nil return or notice of inactivity for a month with no payments. Late returns bring fixed and then tax-geared penalties. HMRC can cancel a business’s own gross payment status where it has not met its obligations, and since 6 April 2026 it has a further power to cancel it immediately in supply chain fraud cases, with a five-year bar on reapplying.
Where PAYE meets the company and its directors
A payroll review does not always stay with the payroll. Benefits, loans and expenses paid to a director sit in the company’s records and in the director’s own tax position. Where a company accounts for tax that should have been deducted from a director’s pay, and the director does not make it good, that tax can itself be treated as the director’s earnings under section 223 of the Income Tax (Earnings and Pensions) Act 2003. If an appeal shows that tax is not the employer’s to pay, HMRC may look to the employee’s Self Assessment instead.
The same facts can raise questions on the company’s corporation tax return. Where a company and its directors both have exposure, the positions need to be handled together rather than answered separately. Our page on compliance checks covers enquiries into company and Self Assessment returns.
What we do
- Establish what HMRC is checking, for which years, and on what statutory footing
- Take over the correspondence and attend any visit or meeting
- Review payroll, benefits and contractor arrangements before anything is answered on substance
- Work through employment status engagement by engagement, rather than by assumption
- Test any determination, decision or notice of underpayment, and appeal it in time where there are grounds
- Deal with penalties and payment, and with the company’s and directors’ positions alongside
If a payroll error comes to light before HMRC asks, correcting it unprompted is generally treated more favourably in the penalty rules than waiting to be found. Our page on voluntary disclosures explains how that works.
Further reading
Common questions
What is an HMRC employer compliance review?
It is HMRC checking how a business has operated its payroll. HMRC's Employer Compliance officers review employers' and contractors' records to check that PAYE, National Insurance and the Construction Industry Scheme are being operated properly, and that expenses and benefits are returned fully and accurately. Unlike an enquiry into a tax return, it is not tied to a single return and can look across several years.
Will HMRC visit the business?
Not always. HMRC says it visits only where it thinks a visit is necessary, and normally arranges it by agreement with at least seven days' notice. Under Schedule 36 to the Finance Act 2008 it can inspect business premises, assets and documents where that is reasonably required to check the tax position, but not any part used solely as a home.
How far back can HMRC go in a PAYE investigation?
A regulation 80 determination of unpaid PAYE follows the ordinary assessment time limits: four years after the end of the tax year, six where the underpayment was careless, and up to twenty where it was deliberate. To go beyond four years, HMRC has to show the understatement was careless or deliberate. A minimum wage notice of underpayment can reach back six years.
Who pays if HMRC decides a contractor was really an employee?
Normally the business that should have operated PAYE: HMRC can determine the unpaid tax under regulation 80 and the National Insurance under a section 8 decision. Where the worker used their own company, the off-payroll rules decide who is liable: the worker's company if the client is small, or the deemed employer, and in some cases the client, if the client is a public authority or medium or large. In those Chapter 10 cases, tax already paid on the same income can be set off.
Is a minimum wage check still run by HMRC?
HMRC still carries out the checks, but since April 2026 it does so under a contract with the Fair Work Agency, which now holds statutory responsibility for minimum wage enforcement. A full transfer of the work to the Agency is planned from April 2027. Notices of underpayment are now issued under the Employment Rights Act 2025, and an appeal goes to an employment tribunal within 28 days.
What are the penalties for underpaying the minimum wage?
A notice of underpayment requires the arrears to be paid to the workers at current rates, and normally adds a penalty of 200% of the arrears, capped at £20,000 per worker, with a minimum of £100. If the arrears and at least half the penalty are paid within 14 days, the penalty is treated as paid. Employers may also be named where the arrears total £500 or more, or a lower figure in repeat cases.
How do I appeal a regulation 80 determination?
In writing to HMRC, within 30 days of the date the notice of determination was issued, stating the grounds. A section 8 National Insurance decision has its own right of appeal, also within 30 days. Once an appeal is made it can be settled by agreement, reviewed by an HMRC officer not involved in the decision, or taken to the tribunal; a late appeal needs HMRC or the tribunal to accept it.
Does a CEST result protect the business?
HMRC says it will stand by a result from its Check employment status for tax tool as long as the information given remains accurate and the tool was used in line with its guidance. The result is only as reliable as the answers entered, so they need to reflect how the work is actually done. Keeping a record of the answers and the reasoning helps if a determination is later questioned.
Start with the letter
Send a photo of page one on WhatsApp. We will tell you what it is, what the deadline means, and what a fixed fee would look like — within one working hour during office hours — Monday to Friday, 9am to 5pm.
We only need the letter. Please do not send bank statements, identity documents or your UTR at this stage.