When an investor's accountants or lawyers run financial due diligence, payroll is one of the first areas they open. It touches tax, pensions, employment law and your accounts all at once, and mistakes tend to build up quietly. A problem that cost nothing to fix in month three can turn into a warranty, an indemnity or a price adjustment in month eighteen.
The good news is that the checks are predictable. If you know what they'll ask for, you can fix most issues before anyone else finds them.
What they'll ask to see
Expect a request list covering most of these, usually for the last two to three years:
- Payroll reports for each pay period, plus your Real Time Information (RTI) submissions to HMRC: the Full Payment Submissions (FPS) and Employer Payment Summaries (EPS).
- Proof that PAYE and National Insurance were paid on time, matched to your HMRC online account. Late payments and penalties will be noticed.
- Pension auto-enrolment records: assessments, enrolment dates, opt-outs, contribution reports and your declaration of compliance with The Pensions Regulator.
- Payroll journals and control account reconciliations showing that payroll in your books agrees to what was actually paid, and that wages, PAYE and pension control accounts clear down each month.
- Benefits in kind: P11D and P11D(b) returns, or payrolled benefits, for things like private medical insurance.
- Contractors and freelancers: contracts, and evidence of how you decided they are genuinely self-employed. Medium and large companies also need IR35 status determination statements.
- Share schemes: EMI option grants, valuations and notifications, plus how any taxable share awards went through payroll.
- Overseas staff: how people working outside the UK are employed and paid (local entity, employer of record or UK payroll) and whether tax is being handled in the right country.
The red flags that slow deals down
1. Pension enrolment that started late
Auto-enrolment duties start on the day your first employee starts, not when you get round to choosing a provider. If people were enrolled late, missed employer contributions usually have to be paid in, and the gap stands out in a data room.
2. Control accounts that never clear
If your PAYE or net wages control account carries an unexplained balance month after month, it suggests payroll and the accounts don't agree. Diligence teams read this as a controls problem, even if every employee was paid correctly.
3. Unreported benefits
Health cover, gym memberships and home-working kit are common startup perks. If they weren't reported on P11Ds or payrolled, there is Income Tax and Class 1A National Insurance to settle, plus possible penalties.
4. "Contractors" who look like employees
Long-term, full-time contractors who work only for you, use your equipment and manage your staff carry an employment status risk. If HMRC treated them as employees, the business could owe back PAYE and National Insurance.
5. Overseas hires paid through UK payroll without advice
Someone who moved abroad and stayed on UK payroll can create tax, social security and even corporate tax exposure in the other country.
How to get ahead of it
- Reconcile the last 12 months first. Agree payroll reports to the general ledger, HMRC payments and pension contributions, then clear or explain every difference.
- Check auto-enrolment from day one. Confirm everyone was assessed and enrolled on time, and fix any underpaid contributions.
- List every benefit and perk and confirm how each one has been reported.
- Review contractor arrangements and record your reasoning on status for each long-term contractor.
- Map where everyone works and confirm each overseas employee is paid through the right route.
- Build a payroll folder for the data room before you need it, with reports, reconciliations, pension evidence and policies in one place.
Frequently asked questions
When should a startup review payroll before fundraising?
Ideally three to six months before you expect to open a data room. That leaves time to correct pension contributions, file amended returns and clear control accounts.
What payroll records do investors ask for in due diligence?
Usually payroll reports and RTI submissions, HMRC payment history, pension auto-enrolment records, payroll journals and reconciliations, benefits in kind reporting, contractor agreements and share scheme records, typically covering two to three years.
This guide is general information, not tax or legal advice. Rules and thresholds change, so check the latest HMRC and Pensions Regulator guidance, or talk to us about your situation.