PAYE health checks as a value-adding exercise

Overlooking a comprehensive PAYE review can expose an employer to significant financial, legal and reputational risks. A PAYE health check is not just about compliance. It is a strategic exercise that can deliver real value to an organisation.

Common problem areas 

PAYE errors often arise from the misclassification of common benefits and allowances, as well as the incorrect distinction between employees and independent contractors.

Key risk areas include travel allowances, the use of company vehicles and fuel cards, the use of company cell phone and internet benefits, subsistence allowances, low or interest-free loans, bursaries provided to employees and relatives of employees as well as share-based incentives. The tax treatment of remote work benefits has also become increasingly complex.

Insufficient consideration of these benefits can result in PAYE misstatements across a number of tax periods for multiple employees.

Benefits of performing a PAYE health check

A PAYE health check entails a detailed examination of an employer’s payroll processes, tax calculations, employee and service provider classifications and statutory submissions. It also includes an assessment of whether an employer is treating all amounts qualifying as remuneration correctly for PAYE purposes.

It serves as proactive tool to strengthen governance, manage risk, and enhance payroll accuracy. By systematically evaluating the tax treatment of all employee benefits and allowances, employers can identify and correct errors before they escalate into costly liabilities.

The main benefits of a PAYE health check include:

Early risk detection

A review helps uncover historic misclassifications or incorrect payroll treatments that may otherwise remain hidden in payroll systems and grow into bigger problems over time.

Improving the accuracy and consistency of payroll processes

It prevents the same mistakes from repeating each month. It ensures that benefits and allowances are treated in line with current income tax legislation and SARS guidelines. It reduces the risk of future errors and audit findings as errors in payroll reporting can trigger SARS investigations.

Enhance tax efficiency and improved remuneration structuring

By correctly categorising benefits, employers may identify opportunities to structure packages more effectively while remaining compliant.

Regularise non-compliance

Identifying the risk and quantifying any tax default provides the employer the opportunity to submit an application under the Voluntary Disclosure Programme.

Demonstrates strong corporate governance and accountability

It demonstrates to SARS that the employer maintains effective controls over its tax obligations and reducing tax risks.

The role of Finance, Human Resources, and Payroll teams in preventing PAYE non-compliance

The finance, human resources and payroll teams play a direct role in addressing the risk of PAYE non-compliance.

In many organisations, the finance team plays a critical role in engaging service providers and processing payments. While these functions are often administrative in nature, they carry significant tax risk—particularly in the context of PAYE where a service provider may not qualify as an independent contractor for tax purposes.

From a finance perspective, this creates a key risk: payments processed as supplier payments may in substance constitute employment remuneration. Accordingly, it is essential that the finance team is able to identify scenarios where there is a heightened risk that a service provider may, in substance, be regarded as an employee.

As the human resources team is responsible for structuring remuneration packages and introducing new benefits and allowances, a clear understanding of the tax implications is imperative, as there is a risk that certain benefits may be incorrectly classified or implemented in a way that creates unintended PAYE exposure.

Payroll, on the other hand, is responsible for the accurate calculation and reporting of PAYE.

It is, therefore, crucial that human resources, finance and payroll teams consider tax implications at the design stage and work closely with tax specialists when introducing or modifying employee benefits and engaging a service provider. 

Consequences of non-compliance

Non-compliance in respect to PAYE obligations can have significant financial and operational consequences for employers. Should it be established that an employer failed to withhold PAYE correctly, the employer may be liable for the unpaid payroll taxes and may face penalties, interest or even criminal prosecution.

SARS may impose penalties and interest on underpaid taxes, with penalties typically reaching up to 10% and additional understatement penalties in more serious cases. The additional understatement penalties where an employer understates its PAYE liability, is based on the behaviour giving rise to the understatement and can range from 10% to 200%.

The applicable percentage depends on factors such as whether the error resulted from reasonable care not taken, negligence, gross negligence, or intentional tax evasion, as well as whether the employer made a voluntary disclosure before detection by SARS.

These penalties can materially increase the total cost of non-compliance, especially where issues persist across multiple tax periods.

If an employer has not been absolved of its personal liability to withhold the PAYE, the Income Tax Act grants the employer a statutory right to recover the amount of PAYE not withheld from the employee. In respect of employees no longer in employment, recovery of the PAYE might not be possible, and the employer will bear the cost of the shortfall in PAYE withheld.

Retrospective corrections also require adjustments to IRP5 tax certificates and PAYE declarations. 

The consequence for the employee is that they will not be entitled to an employees’ tax certificate until the amount due to the employer has been paid. In addition, the employee may not claim a tax credit for the PAYE paid by the employer in their personal tax assessment in these circumstances.

The employee will, however, still be obligated to report the income, which would lead to double economic taxation. SARS may view the incorrect classification as misconduct by the taxpayers in question when the tax returns were submitted, which means that prescription does not apply.

To mitigate penalties, employers may consider pursuing voluntary disclosure where errors are identified proactively. Through the Voluntary Disclosure Programme (VDP), employers can regularise their tax affairs before detection by SARS, potentially reducing penalties and limiting exposure.

Conclusion

In an increasingly complex and scrutinised tax environment, a PAYE health check is no longer a discretionary exercise, it is a critical safeguard for any organisation.

Employers can adopt a proactive approach through regular PAYE reviews and early involvement of tax specialists to enable employers to identify and resolve issues before they escalate.