Employers to Pay for Paye Reform

By Mike Fleming, CTA.TEP. Partner at Straughans Chartered Accountants and Tax Advisers

HMRC’s introduction of Real Time Information (RTI) into the PAYE system looks set to have a negative impact on businesses across the UK, with SMEs particularly badly hit. While it has been presented by HMRC as a simplification of the PAYE system, RTI will in fact generate a significant administrative burden for employers.

The overhaul will require employers to submit employee information on a ‘real time’ basis – each time an individual is paid – as opposed to at the end of the financial year. So an employer could find themselves having to file up to 52 separate reports, if an employee was paid weekly. HMRC claim that RTI reporting will be synchronised as closely as possible with the operation of payroll. However, a recent HMRC consultation document contains repeated references to the need to make allowances for a ‘learning curve’ for employers – evidence, if evidence were needed, that the implementation of RTI is expected to be a headache.

The frequency with which employers must file the information could prove hugely time-consuming and disruptive to business. RTI may help to streamline HMRC’s systems, but is likely wreak havoc for businesses across the UK, especially SMEs.

A pilot scheme is underway to trial RTI. With 310 employers now involved, HMRC report they are ‘on track’ to roll out the system across the UK by April 2013. This is despite the resignation of two key players in the delivery of the RTI system. The resignation of Steve Lamey, Director General Benefits and Credits  – responsible for masterminding the project – and IT Solutions Director Vince Groome  – responsible for making it work in terms of IT –  leaves the project arguably rudderless. What is less clear is whether due consideration has been given to the upheaval the shift to RTI will cause smaller businesses.

I spoke to Enrico Liverani at DCS Payroll, one of the first employers to become involved in the pilot. I was interested to discover his opinion of the RTI system after three months of the trial. He explained that the pressures of filing RTI to HMRC would be compounded for the 65% of businesses who do not use the BACS system.  An employer who paid their staff in cash or used an online banking system could be forced away from such free options to a cost-based solution such as BACS because of HMRC’s requirement to see verification of payments made to each employee. Whether this is a strategy to force businesses into using the BACS system remains to be seen. We have all had experience of what HMRC think of cash transactions! This impression has only been strengthened by David Gauke’s recent comments on the morality or otherwise of cash payments.

Employers should also be aware that the new system is being driven by an agenda imposed by the Department for Work and Pensions (DWP). HMRC itself admits in its Annual Report for 2011 that : ‘the timetable for full implementation is challenging and driven by the Department for Work and Pensions’ timetable for rolling out Universal Credit from October 2013’.

The DWP will use the information harvested through RTI to introduce a Universal Credit System to replace the current benefits structure. The pilot has already channelled 100,000 employee records straight to the DWP to accommodate an unrealistically tight timescale.

I cannot be alone in finding it unfair that employers should be made to work harder to provide information which is essentially making the work of the DWP easier. If information is required for a new initiative, the onus should be on the government and not the employer to do the groundwork.

In a statement tantamount to admitting to reservations about the implementation of RTI, HMRC comments in its Annual Report for 2011: ‘The department has yet to decide how far it will use RTI to improve the PAYE service and will use the pilot to inform its work.’ HMRC has admitted to issues with data quality which it claims is ‘vital to the successful operation of RTI’ and is looking into ways to improve this. It’s therefore unfortunate that Vince Groome – who headed up IT Solutions when the software was developed –  will not be present to oversee any enquiry into its functionality.

Despite a clear consensus from the All-Party Parliamentary Taxation Group in their document ‘PAYE at the Crossroads’ that the government should hold off the introduction of RTI until at least 2015, David Gauke is keen to steamroller the process through nonetheless. Holding firmly to the original plan of a full introduction of RTI by October 2013, with the majority of employers using the system as soon as April 2013, HMRC has set itself up for a fall. The All-Party Group’s concerns lie in two key areas: firstly that the implementation timetable is undeliverable, and secondly that HMRC’s business case is not sound, with the costs of rolling out RTI underestimated while the benefits are overestimated.

I have further concerns about the future uses the data gathered through RTI will be put to. It’s no secret that, as part of the drive to ‘simplify’ the tax system, the introduction of a Self-Assessment system along the lines of the Danish model has been mooted.

As in Denmark, HMRC propose the introduction of a system which will allow every taxpayer online access to their own records.  This would involve releasing tax returns online which have been pre-populated with data. To do this the Revenue will need to approach banks, estate agents, employers, academic institutions, to name a few, to source information on each individual’s income and assets. The onus is then on the individual to make any amendments and additions to their pre-completed form before submitting to HMRC.

Am I the only one to see a theme developing? With RTI and a Danish-style Self Assessment system in place, HMRC could find themselves in possession of some very useful – and wide ranging – data. And all provided through the hard work of the nation’s employers, banks and other agencies! The question is whether they have any other plans for its use. HMRC’s transparency about the RTI scheme being driven by an agenda to supply data to the DWP means it’s within the realms of possibility that the data collected through RTI and Self-Assessment may be channelled to supply other government departments in future.

I would advise keeping a weather-eye out for storms on the horizon and to heed the All-Party Parliamentary Taxation Group’s warnings regarding RTI.  As for the government’s plans to ‘simplify’ the tax system; they should definitely be taken with a pinch of salt.

Mike Fleming is Tax Director at Straughans Chartered Accountants www.straughans.co.uk