HMRC’s PAYE overhaul sparks widespread industry fears

Income tax and National insurance deductions have been totted up the same way since the end of the Second World War, but now the taxman believes it’s time for an overhaul.

Advisers have warned that the most ambitious option being touted by HM Revenue & Customs would effectively turn the taxman into a payroll agency, calculating PAYE upfront rather than checking records submitted by companies.

The Centralised Deduction Plan would see the taxman use more timely information from companies about income and deductions as a platform for centralising the calculation and deduction of tax, NIC and student loan repayments.

This would move the responsibility for undertaking the calculation away from employers and place it fully with the taxman.

But there are concerns this could take work away from accountants who often operate payroll services for clients and the idea of the taxman being able to handle this work has been described as “impossible”.

David Ingall, partner at JWPCreers and member of the UK200 Group, said: “As a firm operating a payroll bureau for clients, the thought of HMRC offering the level of service required is an impossibility.”

Employers need one-to-one guidance on a variety of issues, often requiring help with key services such as wages being reprocessed because of errors, Ingall said.

“That sort of service is not associated with a government department. Additionally, the numbers of staff required to undertake this service will be enormous.”

The overhaul is being floated to achieve two key objectives: cutting out losses generated through calculation errors and helping foil benefit fraud.

At a time when the UK’s coffers are still creaking, the value in raking the maximum amount of money in from PAYE is clear.

In the 2009/2010 tax year, the taxman collected £249bn PAYE from income tax and National Insurance contributions.

Problems currently arise because employers are only required to provide full information on individuals’ deductions annually, after the tax year has ended. This has two effects on the operation of PAYE. Firstly, checks that correct deductions have been made can only be carried out after the tax year has ended.

Secondly, adjustments to tax codes have to be based on estimated income. Effectively HMRC has to ‘guess-timate’, because factors such as a change of job and rates of pay mean actual income can turn out very differently from those predicted when the estimate was made.

The PAYE system also handles pensions, recipients of a state pension and those on benefits, an area which is vulnerable to fraud.

Alastair Kendrick, tax partner at Mazars, questioned how the taxman would be able to handle the extra responsibilities, raising concerns about having the entire operation controlled by the taxman. “What if the whole system collapsed?” Kendrick added.

Advisers countered that more value could be generated if the taxman gave accountants access to the systems which calculated the coding notices setting out how much tax a worker should pay.

“All too often coding notices issued show a lack of thought and contain too many errors,” said Nick Forsyth of Lambert Chapman.

HMRC is calling for comment from the profession during a consultation period ending on 23 September.