Following the tax code fiasco that hit the headlines in early 2010, the government recognised that changes were needed to improve the way that the PAYE system operated, says Martin Jackson.
A discussion document entitled Improving the Operation of PAYE was published in July 2010. This introduced the concept of real time information (RTI) under which information about tax and other deductions would be submitted to HMRC each time an employee was paid. This would enable tax codes to be amended in a more timely fashion to reflect changes in an employee’s circumstances, resulting in more accurate collection of tax under PAYE.
Employers and pension providers will need to start supplying RTI from April 2013, with all employers being brought within the RTI net from October 2013.
Current system
Under the current system, employers provide information about an employee’s pay, and the tax and National Insurance deducted from that pay, to HMRC after the year-end by means of employer annual returns (P35 and P14). These must reach HMRC by 19 May after the end of the tax year to which they relate. Information about expenses and benefits provided to employees (on forms P11D and P9D) is similarly provided after the year-end and this information must reach HMRC by 6 July. This means that the PAYE system is always operating in arrears and other than the most straightforward case where an employee receives only wages or salary, some adjustment will be needed to ensure that the correct tax is paid. This may come either via an adjustment to the employee’s tax code or by a payment or refund through the self-assessment system.
Better information
If PAYE is to be more than an approximation of the tax due from an employee, more timely information is required. This is where real time information (RTI) comes in. By submitting information to HMRC each time an employee is paid, rather than waiting until after the end of the tax year, HMRC will be better equipped to ensure that the correct deductions are made from each employees’ pay, meaning that more will pay the right amount of tax and National Insurance for the tax year in question.
All employers will have to provide details of all payments made through the payroll, regardless of the size.
However, RTI will not extend to benefits and expenses information. This will continue to be provided after the year-end. Consequently, RTI will not remove entirely the need for post year-end re-calculation of liabilities.
RTI will also support the new universal credit by proving the Department for Work and Pensions with up-to-date information on a claimant’s income.
Practical implications
At first sight RTI may seem a big ask of employers. Instead of supplying information once a year after the end of the tax year, they will need to provide information to HMRC every time an employee is paid, be that monthly or weekly. However, the intention is that this will not impose additional burdens on employers. Rather it will become an integral part of the employer’s normal payroll activity. Each time that the employer runs its payroll, the payroll software will collect the information required by HMRC and send it, using the Government Gateway or the Electronic Data Interchange. The latter will be available until at least 2014. In addition, the Government is looking to develop a service which will allow employers and pension providers who make payments electronically (such as through BACS) to send RTI to HMRC at the same time as their payment instruction. HMRC is also enhancing its free PAYE software for small employers (Basic PAYE Tools) so that it can deal with RTI reporting.
Although there will be transitional costs associated with the introduction of RTI, it is expected that once it is up and running both employers and HMRC will enjoy cost savings as compared to the current system.
Other PAYE changes
The introduction of RTI will necessitate some other changes to the current PAYE procedures. In many cases this will reduce the burden placed on the employer.
Currently, where an employer takes on a new starter without a form P45, the employer must complete a form P46 and send it online to HMRC. Once RTI is introduced, the employer will no longer need to submit form P46. However, it will still be necessary to obtain the P46 information from the employee and use it to complete the starter details that will be sent as part of the RTI submission at the time that the first payment is made to the employee.
RTI will also relieve employers of the burden of submitting year-end returns, as instead of providing information after the year end, under RTI employers will submit the information progressively throughout the year. This means that employers will no longer need to complete returns P14 and P35, nor the supplementary return P38A. However, employers will instead need to indicate on their last payment submission on or before 5 April that it is the final submission for the tax year. They will still need to provide each employee or pensioner on the payroll at 5 April with a certificate of pay and tax deducted (P60). Where benefits and expenses have been provided to the employee, they will also need to file benefit and expenses returns (P9D, P11D and P11D(b)) by 6 July.
Getting ready for RTI
Although April 2013 may seem some way off, there are things that employers can do now in preparation for the introduction of RTI. The success of the RTI system will depend in part on the quality of the information provided to HMRC. As part of the RTI joining process, HMRC will align the employee records that they hold on their system with records held by the employer. To ensure that this process is as smooth as possible and to reduce the number of queries, HMRC recommends that employers check the information that they hold on employees is accurate.
Further information on the introduction of RTI is available on the HMRC website at www.hmrc.gov.uk.