Three Types of Audits
| Audit Type | Auditing Authority | Focus Area |
|---|---|---|
| Corporation Tax & VAT Inspection | HM Revenue & Customs (HMRC) | Trading profits, corporate tax returns, VAT records, general accounting ledgers |
| Employer Compliance Check (PAYE Review) | HM Revenue & Customs (HMRC) | Real Time Information (RTI) submissions, payroll records, taxable benefits (P11D), expense reimbursements |
| National Minimum Wage (NMW) & Worker Status Audit | HMRC NMW Enforcement Team / Department for Business and Trade | Working time records, salaried vs unmeasured hours, deductions from pay, off-payroll working (IR35) |
In the UK, HM Revenue & Customs (HMRC) conducts employer compliance reviews and inspections on a risk-assessed, sectoral, or random basis. Businesses displaying anomalies in Real Time Information (RTI) submissions, high turnover of off-payroll contractors, or reported National Minimum Wage underpayments face targeted investigations under Schedule 36 of the Finance Act 2008.
What Is Audited in the HR and Payroll Area
- Overtime premiums and qualifying allowances: Were overtime rates, night work enhancements, or shift allowances paid for qualifying hours actually performed, and are these substantiated by granular electronic time-tracking records?
- Benefits in kind and salary sacrifice arrangements: Have non-cash perks, company vehicles, private medical insurance, and salary sacrifice schemes (e.g. pension contributions, cycle-to-work) been correctly accounted for on Forms P11D and subject to Class 1A National Insurance Contributions?
- Employment status and IR35 compliance: Are freelancers, sole traders, and off-payroll contractors correctly classified under statutory employment status tests, or do they constitute disguised employment caught by the off-payroll working rules (IR35 / Chapter 10 of ITEPA 2003)?
- National Minimum Wage & Working Time compliance: Do working time records prove that total remunerated hours—including mandatory training, handover periods, and setup time—do not reduce effective pay below the statutory National Living Wage or National Minimum Wage rates (NMWA 1998)?
- Business travel and expense allowances: Are business mileage claims, scale-rate subsistence allowances, and travel expense reimbursements fully evidenced by valid VAT receipts, route logs, and verified records of business purpose?
Audit Process
A compliance check is formally initiated in writing by HMRC through a Notice of Enquiry or Information Notice under Schedule 36 to the Finance Act 2008. This notice details the scope of the inspection and specifies the records and data exports required. The check may involve on-site visits, digital inspection of electronic payroll and timekeeping records, interviews with key personnel, a formal closing meeting, and a written closure notice outlining any adjustments, penalty assessments, or unpaid statutory liabilities. Formal statutory reviews and appeals to the First-tier Tribunal (Tax Chamber) may be lodged against contested assessment notices.
Preparation
The single most effective preparatory step is conducting regular internal data export and integrity audits of all payroll- and time-tracking records well before a statutory notice is served. Incomplete hourly activity logs, gaps in working time tracking, unmapped expense receipts, and legacy software systems that cannot generate audit-ready digital exports create substantial financial and penalty exposure. Rectifying audit trails and ensuring digital records comply with HMRC’s statutory 3-year (payroll/PAYE) and 6-year (accounting, VAT, and NMW) retention rules ensures complete compliance during any inspection.
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