Payroll has always presented UK companies with unique challenges. Aside from ensuring employees receive their pay and benefits on time, payroll compliance also keeps companies on HMRC’s good side. The various laws and regulations, meanwhile, are complex and seem to always be changing.
The stakes are getting higher, too. Inaccurate or delayed payroll filings have the potential to seriously dent a company’s profits, intensified by HMRC’s latest announcement about increasing interest rates on payroll-related fines.
Modern payroll compliance is a data-driven effort, given how the authorities expect companies to file and organize their reports. Here are some of UK companies’ most common mistakes when filing payroll reports and how to avoid them.
A Lack of Audit-Ready Records
Every executive leader understands the importance of having audit-ready records, but few manage to execute a process that gives them this result. Typically, smaller companies outsource payroll systems to vendors and trust them to maintain data trails if HMRC comes calling.
While this practice sounds good on paper, reality begs to differ. Payroll service providers usually provide service to several clients at once and cannot offer access to immaculately-organized archives as part of their value propositions. Companies often don’t have ad-hoc access to payroll data, complicating simple tasks like data retrieval and reviews.
As a result, too many business finance leaders are in the dark when asked about the state of their payroll. They don’t know where they’ve been or know where they’re going beyond the templated quarterly report they receive. Adopting electronic solutions is the right course here, and while the growing pains that electronic adoption causes might seem huge, the cost of non-adoption is more significant.
HMRC levies penalties of up to £3,000 for a lack of payroll records and requires companies to maintain records up to three years from the filing date. A manual storage process simply can’t keep pace with these requirements. A company that experiences significant growth will need constant payroll data access. This is why adopting an electronic payroll solution is the right choice.
Late Filings and Payments
HMRC’s filing requirements make electronic adoption a no-brainer. They also implicitly prioritize automation. For instance, the regulator expects businesses to file PAYE reports every month. HMRC even recommends that companies rely on their payroll software to calculate how much tax and national insurance they owe.
Every employer must file reports with PAYE automatically during the month’s pay cycle and pay taxes owed before the 22nd of the following month. In addition, HMRC stipulates employers must notify the regulator of employee status changes, termination, new hires, reductions in taxes owed, and so on.
These reports have separate deadlines attached to them, and keeping pace with them can be mind-numbing without the software’s help. While smaller employers can get away with maintaining a calendar manually with essential dates on it, fast-growing companies cannot use these types of systems to run payroll in a compliant manner.
In addition, they might also find that outsourced payroll providers can act as a growth roadblock. Whether analyzing payroll for discrepancies or correcting records due to employee status changes, companies will find it impossible to keep pace with their outsourced provider’s lead times.
As a result, the risk of incorrect filings increases, leading to a choice between filing incorrectly on the deadline or missing the deadline and filing correctly. Either way, a penalty occurs, leaving the company in a poor situation.
HMRC expects companies in the UK to use software to calculate taxes and other duties owed. While the regulator does allow for some errors in filings due to unforeseen circumstances, it evaluates each case based on its system of “reasonable care”.
Reasonable care’s definition is vague, and HMRC states that it evaluates each company differently. For instance, if a small company maintaining payroll with a simple system makes a mistake, the authorities might be lenient and believe that the business has exercised reasonable care, allowing them to avoid a penalty. However, a growing company in the same position might not be granted this leeway.
Instead of worrying about what HMRC’s standards are, companies are best served by maintaining centralized employee records. Connecting HR systems to payroll reduces the manual work or data transfers companies must execute to satisfy HMRC’s PAYE requirements.
These systems also simplify data reviews. Companies can quickly update and review employee data, automatically ensuring payroll reports reflect changes. Again, the penalties for not adopting electronic solutions are more significant than the initial pain of adopting them.
HMRC will charge up to 30% of additional tax due as a penalty for not exercising reasonable care. If the regulator feels the error was deliberate, this penalty rises to 70%. Very few companies can afford such fines; even if they can, investors and shareholders are unlikely to overlook such easily avoidable expenses.
Payroll Electronification is the Key to Vompliance
Modern companies cannot afford to outsource payroll or run manual processes. They must embrace electronic solutions that automate and integrate with different HR systems. Electronification puts you in the best possible position to satisfy HMRC’s requirements and displays a proactive approach to creating greater efficiency.
Featured image provided by Tima Miroshnichenko; Pexels; Thanks!