How to Manage Payroll After Business Mergers

When there is a major change in the ownership of a business, employee records are significantly affected. Payroll, in particular, can become a mess with information lost during the transition.

In fact, HMRC has acknowledged the problem in their December 2019 Employer Bulletin wherein an employee’s pay and tax details are incomplete after their employer had to apply for a new employer reference. What ends up happening is that new tax codes are issued to businesses providing outdated or inaccurate info, leading to affected employees facing financial repercussions for something they have no control over.

In the same bulletin, HMRC provided an exhaustive explanation on what businesses have to do to update their payroll correctly after undergoing a change in ownership. This article will go over all the steps you need to know, as well as a list of tips to make payroll management easier after mergers.

Steps to Take Upon Changing Payroll

There are two situations during mergers where an employee’s payroll details change, requiring certain steps to be taken to ensure compliance:

  • When a business is given a new employer reference
  • When an employee is moved to a new payroll in an organisation with a different employer reference

Either way, you, the employer, must do the following:

1. Send FPS with leaving details

Send a Full Payment Submission (FPS) with leaving details from the previous employer reference that include year to date pay and tax numbers. You don’t have to give affected employees a P45 form. You do need to give them their total pay and deductions up to the date they moved to the new employer reference.

2. Send FPS with new employer reference

When the leaver FPS has been submitted to HMRC, you must then send another FPS with the new employer reference. This FPS will act as the first FPS for the new employer reference, so the year to date figures for each affected employee will be back to zero.

3. Make sure all details are correct

The new FPS should include employee information for each affected employee. It must also have the start date for the new payroll, with the proper starter declaration. It should be C for BR codes or codes starting with a D prefix, and it should be B for any other code.

4. Calculate and deduct PAYE and NICs

Once you are operating under the new payroll, you need to calculate and deduct PAYE and National Insurance Contributions (NICs) from payments made to the affected employees starting from the date they changed payrolls. If you are operating under a cumulative tax code, use the pay and tax figures from the previous employer reference.

5. Send last FPS from previous employer

The last FPS from the previous employer reference has to be sent before the first FPS for the new employer reference. If you cannot do this, contact HMRC’s Employer Hotline.

6. Send the right form for employees with company benefits

If you have employees that received or continue to receive company benefits after switching payrolls, you have to send forms P11D/P11D(b) with the new employer reference. Send each of these employees a P11D form, and this form should then be filled out with all the information from the old and the new employer references.

Take note, however, that for employees who are transferred to a new payroll under the same employer reference, their PAYE and payroll information will be done under that same employer reference. Send a P11D for each employee that receives company benefits under the same employer reference.

Post-Merger Payroll Management Tips

Aside from following the official procedure, there are other actions you can take to ensure your payroll situation goes as smoothly as possible once the merger is done.

Assess and Plan

While business mergers can generally feel tumultuous, it does not have to be the case with payroll. Calmly review the payroll systems in place for both businesses. It is not unlikely that both could be using the exact same HMRC-recognised payroll software. Data mapping and cloud technology have also made it easier to migrate employee information from one company to another.

With a solid understanding of the current payroll situation, you can draft a plan to accomplish specific tasks with the right people on a reasonable timeline.

Appoint a Payroll Representative

Your mergers and acquisition team should be informed of the goings-on with the changes in the payroll system.

Whether it’s deciding who is in charge of the processes or the contracts that need to be re-negotiated with external payroll vendors, the M&A team must be kept abreast so that costs and expectations can be properly managed. Having a payroll representative on the M&A team prevents any unexpected challenges in costing.

Create Backups of Payroll Data

Plenty of essential data is involved in the process of incorporating employee information from an old payroll system to a new one. If a mistake is made during the migration process, you will need to refer to the original data. As such, it is imperative that you back up every piece of payroll information before starting the process.

Take this as an opportunity to review the data sets and see if there are any errors that need fixing. There are external vendors who offer preparation tools and data integration solutions if you need help.

Run Tests

The software that you will use to migrate payroll data should let you test data transfers. Make full use of your data preparation tool. Testing extends to end-to-end tests of every pay element, ensuring the newly transferred employees are on the new payroll.

Parallel testing with your old and new payroll systems is one of the last things you should do. It is better done to confirm your payroll is set up properly instead of using it to look for errors, as it is a long and complicated process covering multiple pay cycles.

Communicate With Your Employees

The workers who are being transferred to a new organisation and a new payroll system are the most likely to be affected and have the most cause for concern during a merger. Allay their fears with honest and consistent communication.

Have a support staff that can answer questions from employees about the payroll transition. Announcing that you have reached certain timeline goals helps instil confidence in the newly transferred employees that management has everything under control.

Partner With Payroll Professionals

Business mergers bring about a bevvy of changes, with payroll being one of the more problematic issues if it is not handled properly. HMRC expects accurate payroll reporting, so you need to guarantee yours is in working order even with an influx of new employees with legacy data you need to integrate.

Plummer Parsons have payroll professionals that can take care of this side of your business, so you can focus on every other aspect during such a disruptive period in your company’s history. Get in touch with us today.