The Government has announced its intention to introduce a new PAYE scheme, which will go live in 2013. It is a major change to the present situation and will have an impact on all employers.
The present scheme was introduced in 1944, following significant growth in the working population during the Second World War, and there have been no major revisions since then. The new arrangement is entitled 'real-time reporting'. 1 What is 'real time’ reporting? The real-time reporting approach means that employers will be required to provide details to Her Majesty’s Revenue & Customs about the taxable pay of each employee as well as how much income tax and National Insurance is deducted during each pay period. This information will have to be provided within a set period and failure to do so will lead to penalties. HMRC is presently discussing the best means of enabling employers to transmit the data to it but, in the long term, it is hoped that, with the help of the banks, such transactions can be accommodated via the BACS system. In the short–term, it will be possible to supply the information via the internal Government Gateway. Therefore, it is clear that payroll providers will need to adapt their systems to enable them to support the changes in the format prescribed. Once the arrangements are in place and because of the nature of the information that is likely to be required during the course of the tax year, employers will no longer have to prepare P45 forms. P46s will be required to inform HMRC of new starters, however. HMRC will then advise how much tax will have to be deducted from workers’ pay. These changes followed a period of consultation when HMRC made two proposals, the first relating to the above, which found most favour. The second suggestion would have seen employers telling HMRC what they intended to pay a given employee and HMRC advising them of the deductions that had to be made. 2 What are the benefits of the new arrangement? Unfortunately, the proposed changes offer employers no real advantages. But there are a number of benefits for HMRC:
- While in the past, HMRC experienced difficulties with employers not always paying it the full PAYE/NI amount each month, it will now be able to check that it is receiving its due during each earnings period. Failure to pay was particularly marked among employers experiencing financial difficulties as they often retained some funds to boost cash flow. The downside to the new approach, of course, is that if employers subsequently go bust due to lack of cash flow, the Treasury may not receive any money at all.
- With regard to penalties, the new arrangement should give HMRC more opportunities to seek them. Although it has already introduced ‘in year’ penalties for the late payment of PAYE and NI, the information held at present makes it is difficult to ascertain what should be paid when as the department currently only really knows that an annual sum is due and no more.
- When people move jobs at the moment, there is often a catch-up period. But, with the real-time reporting system in place, HMRC will be able to advise new employers about the correct deductions to be made more swiftly. This should make transitions far smoother.
- Tax credits present a big problem today as they are based on an estimate of an individual’s earnings. This can lead to the over- or underpayment of credits and all of the subsequent difficulties in recovering overpaid amounts. Real-time reporting will enable HMRC to monitor possible fraudulent claims which, in turn, should lead to significant cost savings.
3 What will employers have to consider? Because the changes outlined are significant in relation to the operation of PAYE and NI, employers will need to be ready and to understand the risks as they could be subject to major penalties if they fail to understand requirements. As a result, we recommend that employers:
- Evaluate whether they are likely to have any problems paying PAYE/NI during the earnings period.
- Work out whether there are any issues relating to complex areas such as shares or cash allowances paid in lieu of a company car, which will need to be considered in order to agree on new processes to deal with them.
- Enquire of their payroll providers if they intend to supply data reports to HMRC directly in a format that will be acceptable to it. If not, they will need to work out how to comply with this requirement.
- Ask themselves if they are ready for this significant change and understand when they will be hit.
4 When will the new arrangements be introduced? The new scheme will be piloted from April 2012 by employers, pension providers and software developers that have agreed to test it. It is intended to go live a year later, with employers adopting the new arrangement on a rolling basis between April and October 2013. This deadline is later than originally thought and there are still concerns over whether systems will be available to go-live by this date, so again some slippage may be inevitable. The thing to bear in mind, however, is that the Government is committed to introducing the new scheme because of the financial benefits it hopes to gain. It is unlikely, therefore, that the proposed go-live date will shift significantly. Alastair Kendrick is a tax director at accountancy firm, MacIntyre Hudson LLP.