ECSH52725 - Payroll Services - What would you expect to see

Payroll services - compliance visit overview

Accountancy Service Providers (ASPs) who provide payroll services are commonly referred to as payroll agents. A payroll agent calculates the Income Tax and National Insurance contributions due from the employees of a business and the net pay due to them after permitted deductions; e.g. pension scheme contributions.

Customers of the payroll agent will provide details of their employees, hours worked and rates of pay to enable the payroll agent to make the necessary calculations. The payroll agent will check Pay-As-You-Earn (PAYE) deductions are correct and prepare payslips for the customer’s employees. They will also complete forms for the customer’s employees when they leave (P45) and at year-end (P60).

In addition, some payroll agents:

  • have authorisation to make ‘BACS’ transfers of funds directly from the customer’s bank account to that of the customer’s employees. (A BACs payment is a bank-to-bank transfer between banks in the UK. BACS refers to 'Bankers automated clearing system’ – this is the network of UK banks and building societies that participate in this payments scheme.)
  • advise the customer of the PAYE payment due to HMRC and, if authorised to do so, arrange for that payment to be made 
  • complete the customers’ Real Time Information (‘RTI’) returns (discussed below)  
  • offer other miscellaneous services related to the payroll operation (e.g. posting payslips)

 

Employers (the payroll agent’s customer) or their payroll agents are required to submit information to HMRC about tax and other deductions under the PAYE system each time they make a payment to or for the benefit of an employee. Some payroll agents will be involved in the submission of these via RTI for their customers which may include end of year PAYE returns (known as P35s) and returns of benefits in kind received by directors/employees (known as P11Ds).

As with most ASPs, payroll agents will have some computerised records particularly if they are to submit online returns to HMRC. There are software packages available that can be used to calculate Income Tax and National Insurance deductions and most payroll agents make use of one.Some of these include RTI reporting solutions.

Payroll agents may also be engaged by third parties, such as recruitment agencies and other accountants. These third parties outsource the payroll service for their own customers to a payroll agent, as the third party may not have their own internal payroll department. An example of a third party would be an ASP who does not offer payroll services to its customers. Where an ASP’s customer requests payroll services, that ASP may engage a second ASP to provide payroll services on their behalf. The second ASP does not have a direct relationship with the original customer, and instead has a relationship with the original ASP.

Payroll agents are likely to be engaged to do specific tasks and may only see a limited amount of business information or records from their customers from which they may identify suspicious activity. They may provide other ASP services alongside payroll however, which would give them a fuller picture of the customer’s financial and business affairs.

At a compliance visit, an officer should seek to understand all ASP services (relevant activity) conducted by the ASP, how the ASP has risk assessed each service alone and in combination, and how it manages andmitigates those risks.

Record testing should span all of the ASP services provided. For example, where an ASP provides bookkeeping and payroll services, records should be selected where bookkeeping services have been provided, where payroll services have been provided, and where both services have been provided together.

Where the ASP also carries out relevant activity in another supervised sector, an officer should seek to understand the business’s compliance with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) in respect of that additional sector(s). Record testing should span all sectors of relevant services provided by the business, including where provided in combination.

It is not unusual for an ASP to provide an ancillary service which would fall within the definition of services provided by a Trust or Company Service Provider (TCSP). In such cases the business is acting as both an ASP and a TCSP and its Anti-Money Laundering (AML) registration must reflect this, as must its compliance with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer)  Regulations 2017 (MLR 2017) – including the requirement for being fit and proper tested to delivering those services. Providing TCSP services before an application for registration has been determined, which includes being fit and proper tested is a criminal offence.   

For such cases, you should refer to ECSH52775 - Accountancy service providers (ASPs) providing Trust or company service providers (TCSPs) or other supervised sector services - What would you expect to see? and the TCSP sections of the Handbook at ECSH52000 - Trust or company providers for TCSPs for more information.

General money laundering, terrorist financing and proliferation financing risks for ASPs can be found at ECSH52625 General money laundering regulation risks in the accountancy service provider (ASP) sector. At a compliance visit, ASPs should be expected to provide an explanation for any departure from published guidance.