Since 1979, PAYE audit has undergone a major reorganisation and expansion. The number of staff working in this area has almost trebled and the yield from employer compliance and PAYE audit visits has increased dramatically: from £12.2m in 1979 to £313m in 2004–05. In addition, special offices have run particular projects to counter avoidance and evasion of PAYE in trades where it was thought to be rife, and significant success has been achieved, for example in such areas as the film industry and Fleet Street casuals. Tax offices, too, have been involved in the drive to increase the yield from PAYE, setting up ‘director groups’ and Sch. E compliance units to improve compliance with the PAYE regulations, particularly in the case of directors and employees paid at a rate of £8,500 p.a. or more.


In the past, the limited resources employed in this field meant that HMRC concentrated their efforts on what were considered to be high risk areas because of the size of the payroll and/or the nature of the trade and its workforce. As a result, the majority of employers received PAYE audit visits only rarely. While the criteria for selecting cases for investigation ensured that those likely to yield the best results continued to receive the most attention, the aim was to subject all employers to a PAYE audit inspection every three to five years.


For many years, PAYE auditors were part of the Collection Branch of the Revenue (now HMRC). Their task was to examine the wages records of employers to ensure that PAYE was operated in accordance with code numbers and tax tables. Essentially, this was merely a matter of checking for errors of principle or of arithmetic in the records.


This changed in the early 1980s:-


    • the introduction of the selective investigation of accounts indicated that large amounts of tax were not being reported;


    • the extent of avoidance of tax was greatest in owner-managed businesses;


    • reported PAYE tax was the largest single source of tax;


    • unreported PAYE tax would be likely to be relatively more than unreported tax on business profits;


    • the existing examination of compliance was limited to routine checks on records;


    • there was no system of investigation to discover tax which was not on the records; and


    • businesses which operated as limited companies were not subject to the same enquiry system as unincorporated businesses.



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