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PAYE and RTI

Payroll reporting is changing - operating PAYE in real time

 

HM Revenue & Customs (HMRC) is introducing a new way of reporting PAYE - called Real Time Information, or RTI. From April 2013, employers will be legally required to report PAYE in real time. This means that information about all PAYE payments needs to be submitted to HMRC online each time a payment is made as part of the payroll process, rather than at the end of the year as they are now. For most employers this should be handled by the payroll software.

 

What's changed?

 

From April 2013 payroll software will simply collect the information and send it to HMRC online. This will replace the requirement to complete an annual return of PAYE tax and National Insurance contributions. The vast majority of employers will be making PAYE returns in real time from April 2013.

Why this change is necessary - Universal Credit

 

It will make operating payroll easier for employers and pension providers and make the PAYE system easier for HMRC to administer. Over time it will also make PAYE deductions more accurate for individuals. This new way of reporting payroll information will also support the operation of Universal Credit when the Department for Work and Pensions (DWP) introduce it in October 2013.

 

PAYE Today and RTI in Outline

 

For most people PAYE is a straightforward process. Employers apply the tax code and other rules for each employee5 as notified by HMRC. These enable the employer to calculate the tax, NIC and Student Loan repayments due on each wage, salary or pension payment. Employers calculate and make the deductions each pay day. In the following month employers pay these deductions over to HMRC. At the end of the year the employers make a return to HMRC providing details about the deductions they have made which is reconciled as payments already received. Employers also inform HMRC about employment changes as these occur.

 

PAYE means that eight out of every nine employees do not have to complete a self -assessment tax return. It also means that for most people who are taxed under PAYE, no further intervention to adjust their tax position is required. HMRC has recently invested in an integrated database system that has streamlined the handling of PAYE work, making it easier at the end of year to ensure the right amount of tax has been paid.

 

How RTI would work

 

RTI will involve employers changing their current payroll processes. Instead of sending information at year-end, employers would be required, by a change to the PAYE regulations, to provide information when they do their regular pay run for their employees, whether that is weekly, fortnightly, monthly, etc. Employers would also provide details about employer-level payments (i.e. Secondary NIC) at the time they pay over to HMRC the tax, NIC and Student Loan repayments deducted.

 

Currently, employers can choose from a range of payment methods for paying HMRC, including cheque payment for small and medium sized employers. However, the Payments Council is planning to phase out payment by cheque by 20186. Electronic payments are more secure and efficient than cheque payments and businesses are already required to pay Corporation Tax and VAT electronically. As part of this consultation HMRC are seeking views on whether employers should be required to pay HMRC electronically.

 

Once the RTI system has bedded in, and employers have successfully switched to the new system, HMRC envisage that they will no longer have to submit P14/P35 end of year returns to HMRC. The procedures when employees join or leave will also be simplified.

 

It is envisaged that the RTI system will be structured as follows:

 

  • most employers would be required by regulation to use the BACS system to transmit RTI information with payment instructions;
  • a common standard will be used for the transmission of RTI data at all stages of the payments infrastructure from payroll software, through banking interfaces and BACS submission software to the BACS system itself;
  • smaller employers (fewer than 50 employees) who do not pay their employees via BACS will initially be able to submit RTI from their software, or via an agent, using an internet channel through the Government Gateway

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Benefits in kind are not included in the new system with employers still being required to submit forms P9D, P11D and P11D(b) at the end of the year.

Payments under the new scheme will be made via BACS and the use of EDI for PAYE will be discontinued in the longer term.

 

How RTI could improve PAYE

 

Better Information

 

Under RTI, information on individuals’ income and deductions will be provided to HMRC each time an employee is paid. RTI will, therefore, help to get more people’s tax right in-year as it will enable HMRC to adjust tax codes using up to date income information. This will mean that the correct tax is paid in-year in more cases. Currently checks can only be undertaken after the year end once all employers have submitted their end of year returns.

 

Reduced contact

 

HMRC takes approximately 8.6 million telephone calls a year relating to PAYE. Most of these are from customers seeking help in completing forms, ascertaining whether tax codes are correct or asking about a repayment of tax. Many of these calls relate to sporadic or multiple employments or come from pensioners, who can find it difficult to understand the tax on their pensions.

HMRC believes that RTI will help to reduce circumstances which cause this customer contact because more people will be taxed correctly in-year. It will also be easier to answer the questions that arise as HMRC staff will have access to in-year information about the individual’s income and so will be able to provide a better and quicker service.

 

Improved Processes

 

When people move jobs, delays in sending information to HMRC can cause the wrong tax to be deducted. This can be compounded when the new job is a second job. RTI will get information on those joining and leaving employment to HMRC more quickly. For example, RTI will enable the date of leaving to be submitted before the final earnings information.

 

Reduced Administration

 

Under PAYE today employers have to:

  • issue a P45 to all employees who leave employment;
  • notify HMRC of those employees who join and determine a tax code by requiring the employee to complete a P46;
  • make end of year returns to HMRC.

These processes will be discontinued or simplified once the introduction of RTI had been successfully completed. This has the potential to reduce the administrative burden placed on employers significantly.

 

Better Debt Management and Banking

 

Real time information will mean that HMRC can check that an employer is paying the correct amount at the time of payment rather than having to wait until after the end of the year as now. This will enable HMRC to take prompt debt collection action and provide more accurate and timely information to the National Insurance and Consolidated Funds.

 

How it would work

 

RTI will collect information from employers about the deductions from payments to their employees at the time they make those net payments.

RTI will require the employer making a payment to the employee to send data about the calculation of that payment to HMRC at the time the payment is made. HMRC envisage that information regarding Employers’ National Insurance and other employer-level adjustments, such as Statutory Sick Pay, will accompany the employer’s payment to HMRC.

 

The new RTI process

 

The core process envisaged is:

  • each payday the employer would submit the details of each net payment to each employee and the calculation behind it to HMRC. Ideally, this submission will be part of the payment process, ensuring that the information and payment reconcile, avoiding the need for later reconciliation;
  • monthly, the employer would pay the tax, etc. owed to HMRC and provide the relevant information regarding:
  • corrected errors not already notified;
  • alterations for NI recovered in respect of Statutory Sick Pay and Statutory Maternity Pay;
  • alterations for NI compensation on Statutory Maternity Pay recoveries;
  • any adjustment for payments of Construction Industry Scheme (CIS) amounts remitted.

 

As a result of this process, HMRC will have accurate, real-time information about employees’ pay and tax and will be able to reflect this more accurately in the tax codes sent to employers.

 

HMRC also believes that the submission of this information through a secure and validated channel linked to the payment being made to the employee would allow much of the existing employer reporting burden to be removed progressively.

 

Data required

 

Defining the data items that will be required under RTl will be crucial. Employers or their agents will be required to make a submission of all applicable data items each time they make a payment to the employee. The proposed data items are contained in Annex B. This confirms our intention that all the information required for RTI be material that is already collected and recorded by employers for the purposes of PAYE or to satisfy other legislative requirements.

 

The Payroll Process

 

Much of the employer’s payroll process would remain unchanged. The payer would remain responsible for:

  • identifying the amounts being paid that were subject to tax and NIC;
  • calculating the deductions for tax, NIC and student loans;
  • determining any other deductions to be made;
  • paying the net amount to the payee;
  • issuing payslips to employees, and
  • issuing P60s to employees.

What would change is that before, or as part of, the payment process RTI data will need to be sent to HMRC.

 

Payment to HMRC (monthly/quarterly/annual payments)

 

Following the payroll run, as now, in the run up to the payment of tax, etc. to HMRC, the employer would make adjustments for statutory payments and CIS payments due to calculate the overall payment to HMRC. HMRC would acknowledge receipt and make the necessary transfers to the Consolidated Fund and National Insurance Fund.

 

There are several ways that the deductions owed to HMRC could be collected:

  • Integrated payment instigated by employer – the employer would gather all the information needed to make the payment and pay HMRC the overall amount owed by the due date. HMRC would check this amount against the RTI and other information provided and, if the amounts match, note the period closed. If the employer had either paid too much or too little, HMRC would take action accordingly shortly after the due date.
  • Separate payments in respect of employee deductions and amounts due from the employer. HMRC could use direct debit to collect the payments due for the deductions made by the employer based on the RTI submitted. The employer would make a separate payment for Employers’ NIC with appropriate adjustments for statutory payments and CIS deductions.
  • Integrated payment instigated by HMRC: every month on the due date HMRC could collect the amount due by direct debit based on the amounts calculated from RTI submissions which could include information about CIS deductions and statutory payment adjustments as and when these occurred.

 

Currently employers have a choice of payment methods including (for small and medium sized employers) cheque payment. Businesses are already required to pay their Corporation Tax and VAT liabilities electronically and the Payments Council is planning to phase out cheques by 2018. HMRC would welcome views on whether a requirement to pay PAYE electronically should be introduced at the same time as RTI.

 

Joiners and Leavers (P45/P46)

 

When an employee leaves the employer will notify HMRC of the leaving date in an RTI submission.

When an employee joins an employer the employer will still need to ask P46 type questions in order to determine the tax code to be operated. The employer will still be required to:

  • issue payslips to their employees, and
  • issue P60s to their employees at the end of the tax year.

Employers will also be required to issue a ‘final’ tax/pay statement showing:

  • tax paid to date, and
  • taxable pay to date
  • to a leaving employee. If employers’ payslips show this information this would suffice. At the end of the year the employer would issue a P9D or P11D at the end of the year to their ex-employee and HMRC.

This has the potential to reduce significantly the current administrative burden on employers which involves:

  • issue of P45/1s and P45/2s to HMRC when employees leave;
  • issue of P45/3 to HMRC when employees join;
  • issue of P46 to HMRC when employees join.

Instead, they will include details of starters and leavers as part of their regular RTI submission.

 

Additionally, at present employers are required to:

  • issue a P14 to HMRC for all employees they have employed in a year;
  • issue a P35 to HMRC;
  • issue a P38A to HMRC.

HMRC envisage that under RTI, submission of these returns will no longer be required. The information currently collected through these forms will have been submitted throughout the year and HMRC will summarise it to produce equivalent end of year information to update its systems.

To facilitate an improved joining process it is hoped to offer employers a National Insurance Number (NINO) verification service to enable them to check whether the details given by a new employee match HMRC’s records. This would help to address data quality issues and should save employers work to update their records later.

 

Channel choice

 

Currently, most employers use one of the following electronic channels to file their returns and forms:

  • internet channel through the Government Gateway using commercial software;
  • internet channel using HMRC’s CD-ROM (soon to be replaced by a web-based “Basic PAYE Tools”) or HMRC’s online forms and returns service;
  • EDI channel using commercial software. HMRC informs employers of tax codes to operate through EDI, the Government Gateway and, for some, through the post.

 

Analysis of BACS traffic shows that over 90% of employees are paid through this channel. However, HMRC is aware that there are a significant number of employers who do not use electronic payment systems to pay their employees. HMRC would be interested in hearing from those who do not use BACS and why.

 

HMRC intend to provide one alternative electronic channel for those employers who do not currently use BACS. HMRC envisages that such employers would use an internet channel to send information to HMRC. However, as with the BACS channel, this exchange would need to be on a payment by payment basis. It would also need to be transmitted on or before the actual payment to the individual. For the smallest of employers HMRC’s “Basic Payroll Tools” would provide this functionality.

 

There are advantages for HMRC and employers in re-using the BACS channel for PAYE purposes. First, the information about a payment is corroborated by the amount of the payment to which it is attached. The BACS ‘signing’ PKI infrastructure would cover not just the payment but also the linked RTI data. This would allow HMRC to rely on that information without asking the employer to make a separate return and declaration to that effect. Integrating information collection with an existing reliable process brings economies of scale which would allow HMRC, rather than the employers, to meet the cost of the information collection. Employers will still pay the charges for BACS payment, but HMRC will pay the cost of extracting the RTI data from the BACS process. Use of BACS will also allow employers to use a single channel for payment instructions and PAYE information rather than two channels as now.

 

Some small employers have separate calculation and payment processes. Their agent (or software) will do the calculation and prepare separate instructions for the employer to pay. HMRC think it might be appropriate to let such arrangements continue until such time as the software industry or agency can make the necessary changes to allow integration of the payment instruction and RTI.

 

HMRC propose this relaxation should be available to employers with fewer than 50 employees until 2018 where the following conditions currently apply:

  • the employer is not a direct submitter to BACS;
  • the employer makes the payments to his employees but uses an agent to return information to HMRC;

the payment instruction is not made electronically at some point in the process – i.e. the software or agent passes information back to the employer who then phones, faxes, sends the payment instructions on paper or re-keys the data into internet banking software.

As with the BACS channel the employer (or their agent) would be required to submit the real time information at, or before, the time of payment to their employees. This will ensure that the necessary information can be used by the DWP to determine Universal Credit payments at the appropriate time.

 

HMRC and its IT partners will work with the banking industry, those providing BACS submission software and the BACS scheme to develop a common standard for transmission of the payment and RTI data at all stages of the process between payroll software and the electronic banking channel.

 

HMRC believe that re-using the BACS channel and its associated processes is the most effective method for collection of RTI, and offers the best value for money, because it :

  • is robust, resilient and responsive;
  • should not involve extra channel costs for employers who already use BACS to pay their employees;
  • is capable of being implemented by Spring 2012;
  • will minimise HMRC’s channel provision costs;
  • will authenticate information as being correct to a standard that would withstand legal challenge using PKI or similar solutions;
  • is already used to pay the vast majority of payments to which PAYE has been applied.

 

There are currently a small number of specific groups of employers who are exempt from online filing and send paper returns. Excluding those employers from the RTI system could disadvantage their employees (because on their PAYE deductions may be less accurate and they could encounter difficulties when making a Universal Credit claim). HMRC would welcome views on how best to deal with these employers, and their employees, under RTI. In particular, HMRC would like to explore whether these employers would be willing to send paper submissions on a more regular basis.

 

As RTI is a reform to the PAYE system it is not envisaged that it would cover the self-employed.

 

Scenarios – what will happen in practice?

 

P35/P14 End of year process

HMRC envisage that the RTI feed and monthly employer payment and information will replace the annual P35 process. As each submission of information is attached to a money transfer HMRC can be assured that the employee level information reconciles to the payments made to the individual. They also envisage that there will be no end of year return for each individual employee (P14). The employer will remain responsible for preparing and providing P60 information to employees following the end of the tax year. Benefits in kind (P9D, P11D and P11D(b)) will also still need to be reported.

 

If an employer needs to correct an underpayment from a previous year, he can do so, by identifying that this payment was proper to the previous tax year and HMRC systems will reflect this accordingly.

 

What happens when someone leaves?

 

When an employer knows that someone is due to leave, or has left, the departure date, whether actual or prospective, needs to be notified to HMRC. This could either be provided immediately through the appropriate channel (it will be possible to submit information without any associated payment through the BACS channel) or when the next payroll run happens.

 

The current procedure for payments made after an employee’s date of leaving is to apply tax code BR, or after 6 April 2011, code 0T. This will not always collect the right tax but may limit the size of any underpayment. Some respondents suggested it might be possible to change the regulations so that, once the leaving date has been notified, payments made to an ex-employee after that date would be taxed in the same way as if the payment had been made in the pay period in which the leaving date fell. This could improve the accuracy of PAYE as consecutive jobs will no longer have an over-lapping pay period.

 

HMRC would expect an employer to give a departing employee a statement showing the pay and tax paid in the employment. A payslip showing this would be sufficient. If this approach was adopted HMRC would envisage that under RTI employers would no longer be required to issue P45s to HMRC or to the employee.

 

What happens when someone joins?

 

The new employer will obtain the necessary identity data from the employee; ask them if it is their only job and whether they are repaying a student loan. This information will be submitted to HMRC who will, if necessary, issue an updated tax code to be operated along with pay and tax details for the year to-date and instructions on collection of student loan deductions.

HMRC think that this should mean employers would no longer need to send P46s separately to HMRC.

What happens if an employer pays an individual too little or too much?

Where an employer realises that they haven’t paid the employee enough, they would make the extra payment, calculate the deductions as normal and submit the information at an appropriate time.

Any recovery by an employer from an employee who has been paid too much would need to be passed to HMRC as soon as the overpayment was identified. If the overpaid employee has left, HMRC would ask the employer to refrain from making any adjustment until such time as the overpaid amount has been collected. At that point the employer will make an adjustment and submit the correction to HMRC.

What if a company rolls back the whole pay period and starts again having already submitted information

HMRC understands that on occasion payrolls may be reversed and resubmitted with monetary adjustments being made where necessary. If the whole payroll is resubmitted without reference to the previous submission this could adversely mis-state the tax position. Ideally, HMRC would like corrections reported as a change to what has already been submitted rather than overwriting a previous return. However, if it is common practice to re-run pay for specific periods HMRC would require the submission of information to identify this as a replacement of a previous submission and the submission(s) that are being replaced.

 

Statutory payments

 

Details of statutory payments will continue to be captured to ensure compliance and passed to the DWP and the Department for Business, Innovations and Skills, who are responsible for policy on statutory payments, to inform their policy making.

 

Works numbers and employments on NPS

 

RTI will capture works numbers. As part of the transition and data cleansing process these will be matched to employments on NPS. Under RTI employers would be expected to notify HMRC when works numbers change submitting both the old and the new number to ensure that the data submitted can be linked to the correct employment.

 

Makes an error without over or underpaying

 

If an employer makes a payment in one earnings period and subsequently discovers it was proper to another, the employer will need to submit a correction moving the appropriate amount from one period to the other and adjusting if necessary the NI due to reflect the different treatment in the two periods.

 

Operates the wrong code

 

If the employer operates the wrong tax code the tax deducted will be wrong. RTI would give HMRC the opportunity to pick this up and issue a correcting code to the employer during the tax year which would allow a correcting payment to be made at the next pay date.

Conclusion

 

From the scenarios outlined above, it appears that RTI could provide significant benefits for employers, employees and HMRC. The collection of information in real time would enable the PAYE system to work far more efficiently, which in turn would help improve the accuracy of in-year taxation for employees – especially those with more volatile work patterns - and reduce the administrative burden for employers. There are issues still to be addressed, but HMRC believes that by working closely with employers, payroll software developers and payroll bureaux on the design of RTI successful implementation can be achieved.

 

Timetable for implementation

 

The introduction of RTI will be aligned with DWP’s plans for the introduction of the Universal Credit. RTI will support Universal Credit by allowing DWP to access up-to-date information about PAYE income via HMRC. DWP’s timetable requires RTI to be working at October 2013 and available for Universal Credit testing before then.

At the same time, the first consultation has brought out the degree of change that employers feel they would face and the need for us to bring them onto RTI in carefully managed stages. A recurrent theme is that proper, exhaustive testing of all systems before “go live” is vital and the timescales for implementation must be carefully considered and achievable. HMRC therefore plan to deliver the RTI infrastructure for Spring 2012 to allow a phased process of migrating employers, initially on a voluntary basis, to RTI.

 

The timetable for migration could be:

-          April 2012 to October 2012: Test system with a small number of volunteer PAYE schemes (large, medium and small employers).

-          October 2012 to January 2013: Adjust the system to reflect lessons from the testing to migrate a further group of volunteers

-          From January 2013: Mandate large employers to start using RTI

-          From April 2013: Mandate medium sized employers to start using RTI

-          From August 2013: Mandate small employers to start using RTI

-          October 2013: Migration complete.