£75 million of avoidable payroll penalties issued by HMRC since 2020

• £75 million worth of penalties have been issued for payroll reporting infringements since 2020.
• These infringements are typically a result of carelessness, which can be avoided by embedding a compliance culture.
• IFA Acting Director of Professional Standards Tim Pinkney reminds members that payroll is not a risk-free exercise and should not be treated as a simple transaction.

Since 2020, British firms that repeatedly infringe on payroll reporting requirements have been issued with more than £75 million in HMRC penalties, with more than £20 million of that total falling between April 2022 and April 2023.

These figures, reported by software and services business MHR Global, point to a problem in the accounting sector. At a time when businesses require every penny they can get, the last thing they need is a collective £75 million hit to the bottom line.

Such penalties typically result from sloppy reporting, the report said.

“The fact that UK businesses are paying HMRC well over £75 million because of sloppy payroll reporting is ridiculous and completely unnecessary,” said Anton Roe, CEO at MHR.

Beyond sloppy payroll reporting

The underlying problem with many payroll issues, IFA Acting Director of Professional Standards Tim Pinkney says, is that some accounting businesses see payroll as a small, risk-free and transactional part of the job.

“We still get members in firms who will say, ‘I’m just processing the information that the client gave me. It’s not up to me to check it’,” Pinkney says.

Beyond the careless reporting referred to in the MHR report, characterised by missing details, incorrect documentation and late submissions, is a far more troublesome area of payroll compliance that can result in serious reputational, legal and financial strife.

It has to do with anti money-laundering (AML) best practice, Pinkney says, and it can make or break an accounting business.

“When we’re doing our compliance reviews, what we sometimes find is that people don’t see any risks or problems associated with payroll,” he says. “They just accept everything that comes through from the client without looking it over with a level of professional scepticism.”

Pinkney suggests fairly straightforward questions about the payers and payees that arise from that professional scepticism: Where are the funds coming from? How do I satisfy myself that all these people on the payroll are actual people and not ghost employees?

“It’s essential to cast a sceptical eye over it and not accept everything that you receive as being correct. What checks do you need to satisfy yourself that it’s all correct and above board, that it’s all accurate and fair? Avoiding problems in payroll is about developing a compliance culture.”

And it’s not just about the client, Pinkney says. Putting the right processes and mindsets in place to get payroll right is also about setting up your business for success.

Why payroll compliance is good for business

A healthy dose of professional scepticism can work wonders for an accounting business, Pinkney says. When an accountant is constantly questioning data they’re receiving from a company, they’re also developing a deep level of insight into that business.

“That can open up doors to other commercial opportunities,” he says, explaining that an accountant who investigates payroll data may uncover another need – a service they can offer the client, which is of value on both sides of the relationship.

That’s in addition to the value that comes from mitigating risk.

“Professional scepticism helps to protect you, your firm and your employees. The last thing you want is to have to deal with law enforcement investigations because you accepted information without asking questions. Just accepting things, just considering it a box to tick, is not appropriate these days.”

Then there’s the fact that reputation cuts both ways. Accounting businesses that are thorough also appear most competent and knowledgeable. Those businesses, large and small, will attract successful clients that are interested in doing things the right way. Those firms’ compliance challenges, payroll-related and otherwise, will diminish as they bring reputable clients on board.

Accounting businesses that don’t ask enough questions will experience the opposite. They’ll develop a reputation as accountants who simply accept the data they’re given, attracting businesses that would prefer not to have too many questions asked.

“The reputational damage can be very serious,” Pinkney says, warning that compliance issues will pile up and reputable companies will stay away.

“If you legitimise an account for an organisation that turns out to be involved in crime, whether it be petty and inadvertent or whether it’s related to human trafficking and smuggling, no clients will want to be associated with you,” he warns.

“On top of that are large fines, and the potential to find yourself being coerced and pressured by organised crime groups. It’s not a place you want to be.”

Pinkney offers a course of action to those who are asking all the right questions and not receiving satisfactory answers: Under the Proceeds of Crimes Act there is a requirement for any accountant to make a disclosure – potentially via a confidential Suspicious Activity Report (SAR) – if they see information that makes them suspicious of wrongdoing.

What does best payroll practice look like?

Some HMRC payroll penalties will be related to organised crime. Some are a result of carelessness, inaccuracy, tardy payments and incorrect documentation.

The simple fact is that all of those shortcomings are avoidable with good processes and procedures, and a culture of adherence to those processes and of compliance. The penalties are a measure of the hygiene of an accounting department or business.

They’re also less likely in accounting businesses that work more deeply across client companies rather than only managing payroll. This provides greater opportunity to build a thorough understanding of where funds are coming from and where they’re ending up, Pinkney says.

If staff members have the same addresses or the same bank accounts, for example, that could be legitimate or it could be a red flag. The only way to find out is to know the business better or to ask the right questions – or both.

“You need to question everything,” Pinkney says. “Don’t ever take information at face value. Investigate until you’re completely satisfied that the data you’re signing off is true and correct. If you need to, change your own business’s culture to create an environment where you never simply accept what you’re being told.”