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Payroll is going real time in the UK – but can micro-businesses keep up?

Steve Crouch, co-owner/ FD at Crunch Accounting

This April sees the beginning of the 2013/14 tax year in the UK, and along with it the usual tweaks and adjustments to personal and corporate financial rules. For a number of years Her Majesty’s Revenue & Customs (HMRC) has been pushing forward fervently with efforts to move all their services online, and the beginning of the 2013/14 tax year sees perhaps the biggest change to date – the introduction of Real Time Information (RTI) for employee payroll.steve1

At present companies file their employees’ payroll information with HMRC annually, but the introduction of RTI will mean that salary, income tax and National Insurance information must be filed on or before each payday. With most firms paying their staff monthly, this means a twelve-fold increase in the amount of filing required.

RTI has been described as the biggest change in payroll since the introduction of Pay As You Earn (PAYE) in 1944, and is nothing less than a ground-up rethink of the way HMRC handles salary and tax information on the millions of full-time employees across the UK.

RTI is more than just a shift from annual to monthly filings though, it is indicative of a larger trend occurring under HMRC’s roof. Paperwork and old-style forms are out (RTI’s introduction will kill off forms P14 and P35 outright), while APIs and online filing are in. All RTI filing must be done via a compliant piece of software, which will interface directly with what is known as the Government Gateway – essentially a huge portal through which financial information can be securely submitted.

In 2011 HMRC moved all VAT filing online, and the number of Self Assessment tax returns being completed via HMRC Online Services has more than tripled in the last five years, from 23% to 77% in 2011. One thing is clear; HMRC is going all-in moving their services online, and payroll is just the latest addition.

Critics of HMRC’s deployment of RTI have claimed the new rules have been brought into force too quickly, and that many businesses (and possibly HMRC themselves) will not be prepared come April. The Institute of Chartered Accountants in England and Wales (ICAEW) called the planned changeover to RTI “at best unrealistic and at worst impossible”. MPs on the Public Accounts Committee were similarly unimpressed, concluding that HMRC “did not convince” them on the matter.Crunch-logo

Although HMRC are still going ahead with the planned rollout of RTI in April, they have made one small concession and agreed not to issue any RTI non-compliance penalties during the first year the scheme is in operation. Instead of financially punishing non-compliant businesses, HMRC will use RTI’s first year of operation instead to educate businesses about the new rules.

Unfortunately in the short term RTI promises to be a complicated and costly burden for small businesses and the self-employed, even without HMRC issuing penalties.

Accountancy costs, already one of the most significant outlays for SMEs, look set to rise. A survey by Iris in November found that around two thirds of accountancy firms were planning to increase their fees as a result of RTI. Freelancers and contractors who manage their own accounts most likely won’t be spared either – they must purchase new payroll software (unless they use an online accounting solution that includes upgrades in their price) or suffer the ignominy of submitting payroll information via HMRC’s clunky Basic PAYE Tools every month.

Mercifully the smallest of small businesses, sole traders, will be exempt from the scheme as they do not operate PAYE payroll.

Once these bumps in the road have been ironed out, however, RTI should prove largely beneficial for businesses and their employees around the UK. The increased use of software should mean less tedious manual form-filling for the bookkeepers of the world and faster processing at HMRC’s end. Submitting salary and tax information on a monthly rather than annual basis also allows any errors to be identified and corrected sooner.

Whatever your views on RTI, the proof will be in the pudding come April.