How outsourcing payroll can prevent HMRC penalties

Jun21

Posted in News

Fines concept.

Think outsourcing your payroll is the preserve of big business? The latest HMRC crackdown might convince you otherwise…

When HMRC announced it was going to focus its attention on payroll tax errors, you might have expected larger businesses to bear the brunt of the attention. In reality though, something very different has happened. SMEs account for 11% of the total UK tax payroll. Yet they also account for more than half the total HMRC haul from payroll tax errors.

According to national accountancy chain UHY Hacker Young, the government has collected £737 million from investigations into tax avoidance and employer compliance errors, with £373.4m coming from SMEs.

Genuine errors and low hanging fruit

Why is this happening? One argument suggests that SME’s are the ‘low hanging fruit’. It’s easier to find the compliance errors and irregularities in an SME’s payroll because a) there’s less data to wade through and b) your average SME can’t afford the same sort of tax advice as a global brand.

Another argument says the figures demonstrate that the UK tax system is simply too complex, and that businesses are almost inevitably bound to trip up somewhere.

As Roy Maugham, tax partner at UHY Hacker Young, said: “SMEs are being chased for a totally disproportionate amount of underpaid payroll tax, compared to their larger counterparts. But much of the underpaid tax is due to genuine errors. This strongly suggests the government needs to simplify its systems to help SMEs avoid mistakes.”

How outsourcing payroll helps

But there’s another reason too. The larger the company, the greater the likelihood that payroll will have been outsourced. That’s not to suggest that an in-house payroll is any less diligent than an outsourced one, but an external payroll provider does provide protection against compliance errors in a number of ways:

  1. Payroll is the sole role of an outsourced provider, whilst internal payrolls tend to be processed as part of a wider pool of HR duties. Inevitably, errors are more likely when focus is spread across a number of duties
  2. Internal payroll processing is carried out for a day or two every month. Outsourced payroll providers are processing payroll every day, so there’s a greater level of experience that can help spot and minimise errors
  • Things change, and whilst it’s the job of an external provider to stay abreast of the latest HMRC requirements, it’s tougher – and more time consuming – for an internal payroll processor to stay up to date, and know that they are implementing new processes correctly
  1. Should an external payroll processor cause an error that results in loss, the client business has redress against the provider. There’s no such firewall when you handle the payroll in-house

Outsourcing payroll isn’t something only big businesses do. And if the latest actions by HMRC are anything to go by, it may be that SMEs stand to benefit more than anyone else from letting go of the payroll. To find out more, talk to us here.