IT’S BEEN a busy week already for PAYE professionals. On Monday, Exchequer secretary to the Treasury David Gauke announced a move to increase transparency in the PAYE system and launched a consultation on the next stages of the merger of income tax and National Insurance.
Somewhat buried on the same day, HM Revenue & Customs published its draft legislative changes needed for the introduction of the Real Time Information (RTI) initiative, which will require employers to file monthly PAYE returns at the point they pay employees.
All these reforms have been welcomed in principle by tax professionals. While Gauke’s proposals are at an early stage, RTI is looming quickly on the horizon and is an important pre-cursor to the headline reforms. Who will be burdened most when it becomes reality?
The concerns over the timetable for the implementation of RTI have been well documented. By October 2013, every employer will have to submit monthly returns. This date is inflexible – the software and data will also be used to administer the government’s flagship welfare policy, the Universal Credit.
There are murmurings that the Department for Work & Pensions is nervous about the timetable and payroll software providers say they have still not been given the full specifications by HMRC. But HMRC itself seems confident that it will meet the deadline. This week’s draft legislation and briefing note is the next step to realising this.
The headline changes, while not too substantial, do give a greater insight to the government’s direction. They include: a requirement for employers to provide a “leaver statement” for employees instead of P45 and P46s; a need for the payroll software to generate a reference number for every payment made to a single employee; and an insight into how the penalty regime for late filing will work.
Savings or costs?
The impact assessment provides some cheer for HMRC. It claims that £395m will be saved in 2014/15 for the Exchequer as a result of the cleaner data it is receiving. A further £355m will be saved in 2015/16. This will be a good return on estimated investment costs of £116m.
It seemingly offers hope to businesses, which it claims will save £300m in 2014/15 because it negates the need to submit P45s and P46s.
But the interesting element of the impact assessment is the information it leaves out. It says that the £300m will be offset by new requirements for employers to collect and submit information to HMRC. The assessment of these costs is “currently being informed by ongoing research”. Furthermore, there will be “substantial” transitional compliance costs at the point when businesses begin to submit RTI. “Estimates of these costs will be informed both by ongoing research and experience during the pilot”. Even the replacement of P45s and P46s “is likely to cause some concern and disruption, particularly while RTI is new”.
The lack of estimated costs does not bode well. Frank Haskew, head of ICAEW’s tax faculty, says that HMRC’s methodology for calculating the cost of reform to businesses is notoriously weak. For example, the estimated £50 per visit for the business records checks initiative was nowhere near the costs of the preparation and discussions with advisors that would be necessary.
For RTI, businesses might need to change to the BACS computerised payment system. There could be “substantial one-off costs” for the transition.
Small businesses bear the brunt
But it is true that businesses already generate much of the information that HMRC will require. For large employers especially, the benefits could outweigh the implementation costs: the removal of P35 employers’ annual return and P45s and P46s remove significant burdens. They have the buying power that will reduce the implementation costs too.
Of course, it is not all plain sailing for large employers. These benefits will transpire “if the software works – and that is a big if”, says Tina Riches, technical director at the CIoT.
For small companies the benefits are not so obvious. With fewer employees leaving, they are not as burdened by P45s and P46s. P35s, while potentially onerous, only need to be completed once a year and for a business with few employees, its removal is not a priority. In other words, while they are unlikely to benefit from the estimated £300m savings, they still face the costs.
Those in rural areas with lower broadband speeds, or those run by vulnerable individuals face an even tougher task to comply. The regulations sets out exemptions for those allowed to file paper returns, but they remain narrow: employers whose “religious beliefs are incompatible with the use of electronic communications”; and individuals who employ carers to provide services to a disabled or elderly person in their home.
The majority of small businesses that do not have these problems will still likely face higher bills. Payroll software providers are claiming they do not anticipate price rises for the software itself although they will have to wait until the pilot is over before judging the development costs. A note of caution though – when iXBRL changes were introduced, no price rises were initially anticipated. Although the software prices did not increase, the annual maintenance charges did.
Alastair Kendrick, employment tax director at McIntyre Hudson, suspects that companies will see the difference in costs. “How much are payroll providers going to charge for upgrading the system? That to me does not seem to have been taken into account,” he says.
Even without the software increases, there will be burdens. “Involving a third party, HMRC, every month will be a far more onerous approach,” Haskew says. Failure to involve HMRC would incur penalties.
The legislative changes confirm the penalties for the 2012/13 pilot year. In the pilot year, the final RTI monthly submission will be treated as the equivalent of the P13/35 forms with regards to penalties. From 2013/14, penalties will be issued for any late monthly returns as well as late payments.
This in itself is problematic. HMRC has been criticised for sending out penalties at the end of the tax year for late monthly payments. This has affected employers who have a problem with their payment systems without realising it. By the time they receive penalty notices, the penalties have accumulated over 12 months.
On the plus side, HMRC has said it will issue penalties in-year for late filing – a significant and welcome departure from current policy.
The guidance note does not suggest that there will be any leniency for the late filing of monthly returns in the first full year of the implementation. Riches says that the scale of the project suggests there will be less leniency than in previous tax reforms. “Because there are so many returns needed each month, HMRC does not seem so keen on a soft landing,” she says.
Not all bad news
It has to be emphasised that this is still an initiative that is welcomed in principle. HMRC deserves slightly more sympathy than it is afforded for the millions of PAYE coding errors a year that tend to find themselves on the front page of the national newspapers. RTI will hopefully reduce these errors drastically.
But for employers, especially small ones, it provides greater burdens – software costs, moving payment channels, an extra level of bureaucracy and an extra area where they could face penalties. The tight timetable will compound these potential problems. The positive elements clarified in the draft legislative changes – the removal of P35s, P45s and P46s – seem scant consolation in comparison.
Perhaps the main issue for small businesses, says Haskew, is that this is the latest in a long line of changes in PAYE, including the introduction of the National Insurance and PAYE System, which is still being bedded down. “One of the real problems is we never have a period of stability,” he adds. “We would like change to be for the better, but there is always a concern that constant change is placing greater costs on businesses.”
Gauke’s new initiatives will bring about even more changes. They might well be necessary, but it is fair to ask how many more necessary changes can be imposed fairly on businesses before they say “no more”.
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