PLANS TO MODERNISE PAYE have spooked the profession, who fear HMRC will deduct tax directly from payrolls, but the taxman has insisted their concerns are unfounded.
The system – introduced in 1944 when many workers stayed in the same job for their whole career – is well overdue for an update.
Tax experts and business groups have broadly welcomed proposals to update the collection of income tax and national insurance (NI) contributions from peoples’ wages, but there is still confusion about a whether employers or HMRC will be responsible for deducting tax from salaries under the new system.
However, HMRC has been forced to rebut claims that the current PAYE proposal could result in the taxman taking responsibility for deducting tax from employees’ wages, rather than employers.
In July, HMRC first announced plans to overhaul PAYE. In a discussion paper it mooted the idea of a ‘centralised deduction’, which could move responsibility for “calculating and deducting tax, National Insurance contributions (NIC) and Student Loan repayments away from employers to the electronic payment system.”
Some tax experts and business groups have interpreted this suggestion as a sign that HMRC would in effect become a giant payroll agency, which would take over responsibility for deducting tax from employees’ wages.
The latest PAYE consultation, published last Friday, has not calmed these fears.
The Institute of Directors, said the government’s focus on real-time PAYE information in its latest consultation was reassuring, but added: “We are still concerned that centralised deduction remains on the table as an option for the future, even in the apparently harmless form in which it is presented here (it looked a lot more fearsome in the July 2010 consultation document).”
“Centralised deduction would pass over, from the employer to someone else, the responsibility to work out how much tax to deduct from pay and to take that amount off gross pay. That would blur the lines of responsibility. Employees would hold their employers responsible for any mistakes, even though the employers had not made the computations. It would therefore be a great way to damage workplace relations.”
A spokesman for HMRC responded that it had never had any plans to assume responsibility for deducting tax directly from people’s salaries.
“Under real time information HMRC will get the information it receives now, or is entitled to receive more frequently,” the spokesman said. “This is about providing information as and when payments are made. It is very different to monthly filing of returns which would be more likely to increase burdens on business as it would be separate to the payment system. “
“Our proposal for real time information has the potential to reduce burdens on employers. It aims to build on the payroll software and existing electronic payment systems to send information automatically at the same time as the payment is made.”
There is widespread support for updating the PAYE system, but some tax experts doubt whether the proposed reforms will deliver the promised benefits.
Tina Riches, director, technical of The Chartered Institute of Taxation, said: “It’s a good idea, but our response to the first consultation was whether [HMRC’s] IT systems are up to scratch and will it really reduce administration for employers?”
Riches also said she was concerned that HMRC may require accountants to take responsibility for the accuracy of clients’ payroll data sent to HMRC under the new PAYE system.
Graham Farquhar, employment tax partner at Ernst & Young, said that “ambitious” plans to reform the PAYE system would lead to a better level of service for employers and their employees, and a much more transparent and effective system.”
But he added that the size and complexity of the task in hand shouldn’t be underestimated.
Other experts noted that HMRC will have to reform the PAYE system at a time of spending cuts and further job cuts at the department.
“There are many questions raised about the ability of HMRC to build and implement such a complex [PAYE real-time information] system and for the organisation to fully understand the potential issues from the payroll industry,” said Jason Davenport, operations director at NorthgateArinso, a payroll software supplier.
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