A cynic might say that introducing the Real Time Information (RTI) system will move employers and accountants out of the UK’s Kafkaesque tax and benefits system into an Orwellian world where HMRC and DWP see and know everything about salaries and tax liabilities in real time.
But the less cynical will see the move to real time as an attempt to solve a real problem: the billions of pounds lost to the tax and welfare systems through fraud and error every year. It should make PAYE more efficient and ensure HMRC and DWP have up-to-date information about workers’ incomes, meaning the correct amount of benefit is paid to recipients of the new Universal Credit (UC) welfare system to be launched in October. The government claims RTI should generate savings of £300m a year from 2014/15.
The on or before rule – even as amended – completely ignores the way the real world works
RTI will mean employers need to tell HMRC, via an online submission or EDI, about payments to employees, tax, National Insurance and other deductions, on or before the time they are made. Almost all employers and pension providers should start using RTI at some point between April and October this year, apart from those in the RTI pilot (running since April 2012). HMRC will tell employers when they need to start submitting RTI reports in February. Employers with nine or fewer employees will be able to use HMRC’s free Basic PAYE Tools software for RTI reports.
Are the UK’s employers ready? A quarter of small businesses – many of which may need to change payroll processes significantly – are unaware of RTI, according to a survey of 1,700 members of the Federation of Small Businesses (FSB). Some 60% said they had received no information from HMRC about RTI – even though the question on readiness was posed in October and even though HMRC wrote to all UK employers about RTI that month.
HMRC says it is sending 1.4m letters to employers, along with additional targeted paper and email communications, offline and online advertising and RTI roadshows to come.
“We think the timetable is being rushed,” says David Heaton, partner in the employer consulting group at Baker Tilly and chairman of the Tax Faculty at ICAEW. “The software houses are not yet dealing with the final specification.”
But Mark Holden, programme director for RTI at HMRC, says software companies do have the final specification. Holden also insists the system complies with the Carter Principle – stress testing systems to ensure they’re fit for purpose – with the main IT systems having been tested 12 months before mandating of a new online service, and a test service created for developers and pilot users six months ahead of this April’s launch. “Anything [else] we need to add will go into the next upgrade,” he says. Still, it seems unlikely that all payroll software providers will be ready by April. Employers and accountants must ensure they can rely on their payroll solutions.
In theory, most organisations that pay employees monthly should find the transition to RTI relatively straightforward. The biggest concerns relate to employers that pay staff in a less predictable way, such as pubs and restaurants paying casual bar or waiting staff, or businesses employing seasonal labour. They may find it hard to comply with the on or before rule, even if HMRC implements proposals which allow some employers a little leeway.
Chris Try, partner at Try Lunn & Co, an accountancy firm based in Hull, is unhappy about the impact on small businesses. “If you run a garage and employ a couple of lads it represents more things to get wrong, more unnecessary change,” he says. He is also concerned about businesses that don’t use payroll software, or have no access to broadband – or don’t use computers at all.
Holden replies that most employers already file PAYE returns online at year-end; and that HMRC’s software, along with most commercial solutions, work for dial-up as well as broadband. He highlights schemes that help businesses to buy computers for £149.
But there may be problems at the other end of the salary spectrum, for directors of private companies if salary arrangements are complex, or if they use directors’ loans.
HMRC acknowledged these concerns in the November 2012 proposals. Employers could be given up to seven days to report PAYE information if payments vary, depending on the amount of work done, (as for crop pickers or casual bar staff); and for payments to employees for whom employers do not have to maintain a Deductions Working Sheet (P11).
Larger employers have started to prepare,” says Steve Wade, director, tax and pensions, at KPMG. “The bigger concern is [about] smaller employers. The same is true for some accountants.
HMRC also proposes that employers will be given up to 14 days to report benefits and expenses payments subject to Class 1 NICs but not taxed under PAYE. At the time of writing HMRC says it will issue further guidance on reporting of ad hoc payment advances, of payments made by expat employers; and those operating share schemes.
Peter Bickley, technical manager of ICAEW’s Tax Faculty, still has concerns. “The real issue, the impossible deadlines, remains,” he says.
“We continue to press for further relaxations so employers are not expected to achieve miracles and be liable to penalties for failing to do the impossible.”
ICAEW has called for employers to file RTI reports monthly instead. “The on or before rule, even as amended, completely ignores the way the real world works,” says Frank Haskew, head of the Tax Faculty. “We propose that there should be a single RTI return on the 19th of the month following the month of payment: [just as with] the normal PAYE due date.”
HMRC’s Holden is keen to flag up progress being made in the pilot, which included 1,800 PAYE schemes by the end of September, equating to 1.9m records. He says HMRC has sought to include as many different kinds of employers as possible, as have payroll software companies. The 300 employers taking part in the first phase included 130 small employers, 21 of which use the PAYE Basic tool.
But Anita Monteith, tax manager for SMEs at ICAEW, fears the pilot is too self-selecting. “I know of accountants who haven’t joined it because it can’t work for their processes or their clients,” she says.
How are preparations for RTI going outside the pilot? “Larger employers have started to prepare,” says Steve Wade, director, tax and pensions, at KPMG. “The bigger concern is [about] smaller employers. The same is true for some accountants.”
The most important step in employer preparations is to check employee data. HMRC will help larger businesses through a payroll alignment process, although in some cases this will not happen until the first RTI payroll run.
Sue Baxter, in-house employee tax manager at PwC, says HMRC has already helped her company spot problems, such as a large number of 1st January birthdays; and NI numbers which match an individual’s birthday. She also anticipates hiccups connected to the on or before rule. For example, PwC may have to restructure its settling in allowances, paid to employees who have come to the UK from another country and face unexpected expenses before their first payroll.
Yet we’ve been through big changes before, like the introduction of self-assessment, and survived. Why shouldn’t the real time revolution succeed? “[RTI should mean] employee tax codes will be correct straight away, because adjustments will be done on a daily or weekly basis to avoid overpayment of benefits,” notes Denise Love, senior payroll bureau manager at accountancy firm Menzies. RTI really could make end of year much less of a pain in the neck.
“But why does business always have to bend over backwards to fit in with what government decides – purely for the minority of people claiming Universal Credit?” asks Monteith. “There will be some benefits, but as ever, it’s too much change happening too quickly.”
Holden remains unrepentant. “PAYE needed to be updated,” he says. “[RTI] takes a massive end of year burden away from businesses, large and small.”
Radical Technical Innovation, or Really Terrible Idea? Come April, we’ll know the answer.
How RTI works
RTI reporting will become part of normal payroll activity, with the employer sending the necessary information to HMRC on or before the payment date as a Full Payment Submission (FPS) through either the Government Gateway system or via Electronic Data Interchange (EDI) – at least until April 2014. In future BACS will also be used.
At the end of the tax year employers or pension providers will indicate which is the last payment submission for the tax year, provide each employee (or pensioner) with a P60, then complete P11D forms, as under existing arrangements. The smallest employers will be able to file employer returns online using free HMRC software.