RTI - Improving the operation of PAYE

RTI is the most fundamental change to PAYE reporting since its inception in 1944. Employers will need to report information to HMRC every time they pay their employees instead of once at the end of the tax year. Payroll software will collect the necessary information and send it to HMRC online.

The first official rumblings of the PAYE improvement proposals came from the Conservative party early in 2010 where HMRC then published a discussion document to gather input from employers, payroll bureaux, agents and other stakeholders with a vested interest. This document explored the option to move to a system that collects information on PAYE deductions at the time employers pay individuals, namely RTI. The second stage of consultation was then published in December 2010. 

Throughout, the government’s objectives have remained static - to reduce costs both for employers and for HMRC by making the system easier to administer; to improve service levels for individual customers and to ensure accurate and timely tax deductions.

HMRC do admit that PAYE works well for the majority of people, particularly those with stable circumstances, but because processes have basically remained unchanged since they were introduced, there are some limitations. For example it is common now for people to have more than one concurrent job or pension, or have unpredictable employment patterns.  So with information only going to HMRC once a year they are always playing catch up with these individuals’ tax affairs.

Universal Credit system
One of the areas that has caused concern for employers is the tight implementation timeline for such a big change to the PAYE reporting system. The Department for Work and Pensions (DWP) is overhauling the UK benefits system and is introducing a Universal Credit system which will combine many of the current benefits, tying in with the government’s ‘make work pay’ policy and helping to break the cycle of benefit dependency. In order for the new system to work, the DWP requires the information that RTI will supply about individuals’ income to ensure the correct entitlement to tax credit is given. The DWP is driving the timeline of ‘all on board’ by October 2013 so RTI must be used by all employers by this date to support the introduction of Universal Credits.

Main changes for PAYE under RTI
All employers and pension providers will send details of all payments made (or to be made) through the payroll irrespective of the amount of pay (or pension). There are three main changes that will happen under RTI:

Employers will be required to send information to HMRC about their employees’ pay and deductions, before or at the same time as they are paid; The year end process of submitting P14s for all employees and a P35 summary and employer declaration will no longer be necessary and neither will the requirement for submission of the P38(A) annual return, and; The starter and leaver process is to be overhauled and under RTI, employers will not have to complete and send a form P46 for new employees to HMRC. The P46(Expat) form also ceases and the future of the P46(Pen) is currently under consideration.

Employers will still have to issue P60s to employees and pension recipients following the end of each tax year. Benefits in kind are not included under RTI so employers will still be required to submit forms P9D, P11D and P11D(b) following the end of each tax year. 

Data Quality
In 2009, HMRC introduced their National Insurance and PAYE Service (NPS) which combined 12 regional data bases into one system. You will no doubt have seen the media furore when the system identified multiple tax code errors and started letting individuals know that they had either underpaid or overpaid tax over the last few years. This was proof that the system E E was holding a high number of incorrect records but it has resulted in HMRC’s data being more accurate than ever before.  

Analysis shows that the key issue is matching data sent by employers with HMRC’s records. Around 80 per cent of errors in employee data are due to an incorrect name, date of birth or national insurance number – straightforward information that can be collected and checked quite easily.  So, whether you are employing ‘Mr or Mrs J Smith’ you must use the full and official name on your PAYE reporting. First names are very important, especially for common surnames.

This may seem like common sense but HMRC are really stressing the importance of putting good procedures in place to ensure that employee data is correct. Don’t assume the information you are provided with is correct; best practice would be to ensure official documents have been provided to validate the information. 

Employer Alignment Submission (EAS)
Now to introduce you to the key new processes and some of the jargon that goes with RTI. The very first requirement under RTI is an alignment of employee details with the data held on HMRC’s NPS system. For larger employers this will be done by completing an EAS and for smaller employers a First FPS (Full Payment Submission) which will include certain key details about employees. In most cases HMRC will update their database with the details from these submissions and will then instruct you to start submitting RTI every time employees are paid, using a FPS.  Employers will be contacted directly with an instruction as to when they must do their alignment submission and in what format.

The fundamental difference between this first alignment submission (EAS or First FPS) and your regular submissions (FPS) is that you must include all details of not only active employments but also the details of any starters and leavers in the current tax year. So if you are instructed to submit an EAS in the August of 2013, you must include details of any individuals who you have employed since 6 April 2013, regardless of whether they have since left your employ. Once the EAS has been successfully submitted, the employer is considered to have joined RTI and can start sending FPS submissions immediately.

\As with any new system there are bound to be teething problems and there are areas that are still ‘work in progress’ so it is reassuring to know that in advance of the mandatory RTI requirements next year, in April HMRC began a pilot with volunteer payroll software providers and employers. In the first month of the pilot HMRC will progressively bring on 10 employers, representing a range of size, type and payroll software provider with the aim of testing the system and support to optimise performance and iron out any issues.

Subject to the initial pilot being successful, up to around 1,300 volunteer employers will be reporting RTI by September 2012. By March 2013 it is hoped that around 250,000 employers will have been invited to join. RTI will then become mandatory and all other employers will be directed to join from April 2013 through to October 2013.

Is this the first you have heard about RTI?
Despite a variety of communications from HMRC and other representative bodies to businesses, not everyone is aware of the RTI regulations.  So if this is a totally new subject to you and you deal with paying employees and/or reporting PAYE to HMRC then it is important that you consider the following:

If you use payroll software, it will need updating so that it can process and submit RTI data - you may need to discuss this with your software provider

If you do not currently use payroll software, you will need to plan ahead now so that your business will be able to submit data RTI to HMRC electronically when required to do so.

If you have nine or fewer employees you can use HMRC’s free Basic PAYE Tools. There will be a new version available to download once you are invited to operate PAYE in real time.

If you pay your employees by direct Bacs you will need to include the hash cross references in your RTI submissions (see HMRC guidance on generating the RTI cross reference at www.hmrc.gov.uk/rti/index.htm). You should speak to your Bacs Approved Solution Supplier or Bacs Approved Bureau about this.

If you use the services of a payroll bureau, bookkeeper and/or agent you should discuss how RTI will affect your business and the changes you need to make to your PAYE processes as soon as possible.

Once you begin to operate RTI, if you do not submit your PAYE data to HMRC on time you may incur penalties.

RTI help and support
Guidance is still being drafted. It is hoped that final versions will be available by October 2012. In the interim HMRC and the CIPP publish news and updates on their websites.


 - www.hmrc.gov.uk/rti

Business Link e-mail alerts - www.businesslink.gov.uk/hmrcemployeremailalerts