The story so far
It might best be known as the penultimate year of World War II, and all the horrors that went with it, but 1944 has another, less bloody, claim to fame. With the war leading to growing numbers of people paying tax, a more efficient collection system was needed. So, in 1944, Pay As You Earn (PAYE) was born.
Not much has changed since. But this April, the switch to Real Time Information (RTI) reporting represents the most significant change to the PAYE system since it was introduced almost 70 years ago. And any business that hasn't started making the change is now sitting in the Last Chance Saloon. Businesses with fewer than 5,000 employees not yet in the pilot scheme must be compliant with RTI by April 2013, and businesses of all sizes by October 2013.
Why the change?
Under the current PAYE system, HM Revenue & Customs (HMRC) cannot be sure people have paid the right amount of tax until after the year end, meaning a significant number are left with overpayments or bills. By moving to an arrangement under which payment information is submitted at the time payment is made, things should prove easier for all parties concerned.
HMRC reports RTI will reduce administrative burdens on businesses by £300 million a year from 2014/2015, although it concedes they may face some additional transition costs, and it expects over- and underpayments of tax will also be reduced by around £300 million a year.
The move also supports the introduction of Universal Credit by the Department for Work and Pensions (DWP) in October 2013, which is aiming to help break the cycle of benefits dependency and 'make work pay'. The DWP requires the information that RTI will supply about individuals' incomes to ensure they are given the correct benefit entitlements.
Jan Marszewski, spokesperson for HMRC, says: "PAYE remains efficient as it costs less than a penny in the pound to collect and means that millions of taxpayers don't have to fill in tax returns. But the numbers of those with volatile incomes has increased, and it's now more common to have more than one job or pension and to change employer more frequently. RTI will provide HMRC with more up-to-date and better-quality PAYE information, over time helping to improve the service to individuals by making PAYE more accurate."
Although the actual calculation of tax remains the same, under RTI the frequency of reporting is increasing.
Instead of being required to submit an annual return by May 19th:
- All employers must submit a Full Payment Submission (FPS) form, containing information about each employee or pensioner, on or before the date they pay their staff.
- Some employers will also have to submit an Employer Payment Summary (EPS) to reconcile any difference between what is reported on the FPS and what is going to be paid over.
- At the outset, HMRC will compare information held by employers and pension providers with information held on their own database in order to align the two. So, employers will need to undergo an alignment process and in most cases this will involve completing an Employer Alignment Submission (EAS).
Samantha Mann, senior policy and research officer at the Chartered Institute of Payroll Professionals (CIPP), explains: "If you pay staff monthly you will be replacing one employer annual return with 12 FPSs and if you pay them weekly it will potentially be 52 FPSs. Early experiences suggest the actual mechanics of RTI will be straightforward. However, long-standing processes will need to be reviewed as a result of these changes."
Straightforward as the requirements may be, some experts are predicting teething problems when the vast majority of businesses start coming on board this April. The pilot involved 10 employers when it began in April 2012 and HMRC expected it to include 250,000 by March 2013, though figures for the pilot have recently been revised sharply downwards.
Ellie Gamble, associate director at tax and advisory firm Grant Thornton Solutions, echoes the worries of many. "It concerns me that there has been no capacity testing of the system," she says. "To say a system is working well with 250,000 volunteers is encouraging, but there will be a massive influx in April, at what is already a busy end-of-tax-year time. So be aware there could be software issues at this point, and always check that something you've filed has received a response saying it has been successfully received."
Prepare yourselves: what to do now
Any employers who haven't already done so need to be checking their employee data is accurate, as they will have to provide HMRC with details of staff members' full names - including all forenames - addresses, dates of birth and national insurance (NI) numbers. For small businesses this could involve little more than emailing a template out to all staff asking them to provide these details, but larger employers, especially those employing significant numbers of casual workers from abroad, may wish to consider using an external third party.
Kate Upcraft, director of payroll consultancy ISIS Support Services, warns the data requirement will also necessitate a change in recruitment strategies as HR teams will have to verify all personal details about new recruits, using passports, birth certificates and utility bills.
In fact, HMRC reports around 80% of errors in employee data made on PAYE returns are due to an incorrect name, date of birth or NI number. Its returns for 2009/10 included 507 'AN Others', 824 'Unknowns' and 527 surnames containing only the letter X. And 40 people were apparently 200 years old or more, as a result of incorrect dates of birth being submitted.
However, Samantha Mann stresses the numbers involved with such errors are relatively small in the context of the entire UK workforce and most payroll professionals are already providing the highest quality data, being prompted by their software when items are missing.
"For the vast majority of employers with proper procedures who are already making every effort with the information they collect, it should just be business as normal," she explains. "But some employers, possibly smaller ones without full-time payroll professionals, may be making these mistakes as it hasn't been compulsory to have that standard of data."
So, employers also need to be checking their systems are RTI-compliant, which will probably mean talking to their software provider. For some organisations it may not involve much more than getting a software update, but for others it may mean they need a whole new system.
David Woodward, chief product and innovation officer at Ceridian UK, argues it all depends on the level of service a company is currently getting. "If you are using a piece of software in-house from an external provider, the chances are you will have more to do. You must check it has been updated with an RTI-compliant version, update your BACS software and check you have the software needed to communicate with HMRC. If you are communicating via the internet, this could be part of a payroll package, but if you use electronic data interchange (EDI), it requires a new piece of software."
However, if your provider runs the software for you on their systems, and accesses it via the internet, they will be responsible for the changeover. But Woodward warns: "You still need to communicate with the provider to double-check they are doing something and to check whether it will cost anything."
Of all of these technical tasks, the need to upgrade the BACS software is probably the easiest to miss. It is not always on the same system, even if it appears to be to the non-technically minded.
Bob Newsome, strategic payroll consultant at HR services supplier MidlandHR, puts it in simple terms. "The BACS file at the moment is very rigidly formatted, with one line per person, and field seven is currently four blank spaces. When you run your payroll it has to populate these four blank spaces with a different random number for each employee. Your updated payroll software should do this for you, but you must make sure your BACS software is up-to-date and can accept the extra four-character field."
Advice for SMEs
Lack of awareness of RTI compliance is much more of an issue for small and medium sized enterprises (SMEs) than for large employers. A Federation of Small Businesses (FSB) survey carried out in October 2012 found only 16% of respondents were fully aware of the RTI programme, and 25% had never even heard of it.
But at least those SMEs that take action now should manage to become RTI-compliant by the April deadline, which may not necessarily be the case for larger organisations that have more complex software requirements. Smaller companies also tend not to have dealt with the problem of ensuring different departments liaise effectively on this issue - one person may handle everything.
Some small businesses are not accustomed to using sophisticated software and others are sited in areas without access to broadband services. EDI may not represent a cost-effective option to them.
Mike Cherry, national policy chairman for the FSB, explains: "HMRC's system relies on a good online connection, and broadband is not universally available, particularly in rural areas. So some businesses may have to use third-party broadband suppliers and possibly have to travel significant distances with information on disc where broadband misses out entire geographical regions.
"Also, the 6% of businesses our survey shows do payroll manually will either have to buy software and ensure they have adequate online provision to submit data, or else find an accountant, payroll bureau or bookkeeper to do it, which could involve significant costs."
Steve Wade, a director in KPMG's tax practice, points out that small businesses who currently pay employees net cash amounts - with their accountants calculating the tax and NI contributions due later, but in time to pay it to HMRC by the 19th following the end of the tax month - will need to calculate tax and NI contributions weekly or, in extreme cases, even daily. He also highlights potential issues for SME owners and directors.
"Under RTI, whenever a payment is made to a director you must determine the nature of it at the time it is made so the correct report can be given," he says. "For example, a dividend or the making of a loan isn't reportable through RTI as they are not subject to PAYE, but salaries are. At the moment, people often work out the details later."