The dream behind the introduction of real-time information (RTI) was that it would make PAYE accurate, collect tax more efficiently, and reduce the level of contact between taxpayers and HMRC. Has that dream materialised? The key achievement of RTI is that nearly all employers report PAYE data monthly or more frequently, but this should not be the only measure of success. More investment is needed to make RTI a success for all taxpayers.
The original proposals for the improvement of PAYE included the call for ‘centralised deductions’ to remove the responsibility for calculating tax and NIC deductions from employers and to place it with HMRC. This was quickly dropped by the time the consultation was published on 3 December 2010. This indicated that the PAYE process would be simplified for employers, costs would be reduced by an estimated £360m per year, and PAYE would ‘be accurate for more customers’.
Costs for implementation by employers were estimated as:
The timetable for implementation was very short because it was driven by the introduction of the universal credit. Halfway through the second year of RTI, the danger is that the project is now viewed as completed and the future potential of RTI is missed due to the lack of investment.
RTI went live on 6 April 2013 and nearly all employers in the UK are now filing under RTI. Despite many observers expecting system problems, the computers kept running. By September 2014, ‘over 95% of PAYE schemes had joined the system, with 70% saying that it is easy to do’, according to HMRC. The major aim has been met of all schemes reporting. This major achievement has been a significant cultural change for employers, agents and HMRC. But how does RTI compare with the five aims of the original consultation? These were: better information; reduced contact; improved processes; reduced administration; and better debt management and banking. I consider each in turn.
Clearly HMRC is, in one sense, getting better information. Employers are now reporting during the tax year, with the vast majority of employees’ data being reported monthly or more frequently. Unfortunately, in the author’s opinion, this is not always being used to ‘get more people’s tax right in-year’.
The number of P800 reconciliations do not appear to have reduced and this author does not expect the number of 2014/15 reconciliations to reduce either. Also, the number of PAYE codes that are issued on a week 1 or month 1 basis again appear too high for significant improvements to have been made. However, only HMRC has this information for all the PAYE schemes and to date the department has not released this information. HMRC also reportedly declined to provide the magazine Payroll World with information on penalty warning letters, as this could ‘prejudice the collection of tax’.
To avoid a war of words, HMRC should agree a set of statistics with stakeholders that can be used to monitor the success of RTI on a year by year basis.
HMRC collates statistics on whether the correct PAYE codes are issued. The difficulty is one of perspective. HMRC views PAYE code numbers as correct that agents think are wrong. In fact, both perspectives are correct! To understand how this can be, consider the example of a PAYE code issued in response to a form P11D showing a one-off benefit. The agent would then ask for the code to be corrected because the benefit was no longer provided and the tax had been paid under SA. The form P11D was correct, because for many benefits the form doesn’t have a facility for the employer to say that the benefit had ended.
HMRC would view the code as correct because it was issued following its procedures, whereas the agent would view the code as incorrect. Consequently, HMRC should seek agreement with stakeholders as to how the statistics are to be measured.
HMRC believed that RTI would help to reduce taxpayer contact because more people would be taxed correctly in-year. The author’s view is that this is unlikely at the moment due to, for example, the difficulties with P800s (reported in Tax Journal, 17 October 2014) and HMRC’s lack of training on RTI.
The HMRC helpdesk’s first response is frequently to assume that the employer is at fault and to suggest that the employee contacts the employer. When the employee does so, the employer refers the employee back to HMRC, thereby doubling the number of contacts.
If RTI is so successful, why does HMRC need the power to delay the issue of PAYE codes to the employee for 30 days? The rationale is that this would reduce taxpayer contact. The author believes this suggestion is likely to increase rather than decrease contact with HMRC, because it means the employee will query why his/her code has changed.
HMRC receiving PAYE data in-year, rather than after the end of the year, is clearly a great leap forward. HMRC can easily spot, for example, any employers tempted to delay paying their liabilities in full each month. The accuracy of coding notices remains hampered by issues with the form P11D not providing the information necessary for correct coding. Adding boxes to the form to indicate that benefits had ended would have had a greater impact on the accuracy of PAYE codes for far less cost than RTI.
The current RTI processes suffer from the speed at which they have been implemented. There are too many to detail in this article but a few glitches include:
Date of leaving
The date submitted can only be 30 days in advance, less than many current notice periods. If you provide HMRC with an incorrect leaving date, you cannot update the date in the next FPS. That is likely to cause a duplicate record. You have to inform HMRC separately of the change and may have to keep an incorrect date in your payroll software to stop it being submitted to HMRC.
Final full payment submission: HMRC’s statement on incorrect P800s says: ‘The majority of errors have happened because an employer failed to make a final full payment submission for the 2013/14 tax year, meaning our records were incomplete’.
This suggests an incomplete process. Could the process be improved by HMRC systems blocking P800s until the year’s complete data is received?
Earlier year update
It is inevitable that mistakes will occur and employers will need to amend their data after the end of the tax year using an earlier year update (EYU). A number of updates had not been processed correctly when HMRC issued the P800s.
The extent of this EYU problem isn’t clear. Press reports suggested that up to 5.5m employees could be affected, whilst HMRC’s statement on gov.uk said ‘a small proportion’ of the 2013/14 P800s and payable orders issued in the three-week period from 15 September were affected, although this does not address whether errors occurred prior to 15 September. HMRC’s advice was to stop submitting all EYUs; this has now been updated to clarify that it is acceptable to send one EYU, but not a second one.
Whatever the cause or extent of the above problem, in the author’s view, the EYU process is fundamentally flawed. HMRC sometimes asks employers or their agents to submit an EYU to correct the data HMRC holds. Unfortunately, the employer cannot just submit the correct information, but has to submit an adjustment to the figure that HMRC holds; and herein lies the flaw. Frequently, the employer believes the correct information has been submitted and consequently cannot know the value of the adjustment required. It is unfortunate that HMRC’s frontline staff do not appear to understand this and ask the employer to submit an EYU without providing details of the data held by HMRC.
This process would be more efficient if the employer had the option of submitting the correct data, rather than an adjustment. HMRC’s systems could then automatically calculate the adjustment.
Employer payment summary
Not all payroll software supports the employer payment submission (EPS), as there is no legal requirement to submit one. The EPS is used to claim the NIC employment allowance, credit for statutory payments and construction industry scheme deductions.
Clearly, employers will want to claim these allowances and credits and, therefore, complete an EPS. The other reason for submitting an EPS is to report that an FPS wasn’t due because no payments were made to employees. Initially, this was overlooked by some employers and agents. With experience, compliance appears to have improved, but it is hindered by the awkwardness of the process – the processing of the EPS being dependent not only on its content, but also the time of its submission.
Fortunately, improvements are on the way. From October 2014, EPSs can be accepted indicating the tax month the EPS credit should be allocated against. Employers will need updated software and that is likely to be when next year’s versions are released (assuming their software currently supports the EPS).
HMRC could automatically calculate the relief due for statutory deductions from the FPS submission. The author understands this is being considered by HMRC but that no decision has been made and there does not appear to be funding available for this improvement.
The ‘on or before’ requirement continues to cause difficulties for some employers – and this is not limited to the micro employers currently benefiting from an easement from reporting ‘on or before payday’. In the author’s view, employers’ costs would be less if they all had the option of monthly reporting. At the very least the current easements for micro employers should all become permanent.
Duplicate records
The biggest difficulty with RTI is the number of duplicate records that the system generates. A duplicate record means that the employee is then recorded as having two employments. The consequences may include a BR code being issued, the employee being asked to pay higher rate tax or having benefits reduced.
HMRC is getting better at removing such duplicates when their sweeps of the system catch them but they are continuing to occur. For example, many scheme transfers cause duplicate employments. In fact, scheme transfers are so problematical that HMRC advises that you talk to it in advance. Following such advice, however, doesn’t always guarantee success.
It can be very time consuming to resolve problems caused when the tax payments made do not reconcile with the FPS data recorded by HMRC. HMRC has set up a specialist ‘disputed charges’ team which, according to the OTS, is dealing with ‘12,500 out of a total of 1.8m schemes’. HMRC has issued letters to these schemes saying: ‘We will get back to you as soon as we can during the next three months to either:
The author believes that the 12,500 are only the most serious cases. Any scheme that believes it has a payment discrepancy and hasn’t received a letter should query the position with HMRC.
These letters were issued in response to pressure from stakeholders, after queries were outstanding for many months, and are evidence of one problem with RTI. There is a lack of feedback to employers, agents and software developers, with the danger being that mistakes get repeated and taxpayers lose confidence in the system. Contrast this lack of response with the need, under the threat of penalties, to report to HMRC on or before payday.
Joiners and leavers
The reporting of joiners and leavers is another cause of duplicate employments. HMRC is reviewing the process and hopefully improvements will be made. These will not, however, flow through until at least next year and possibly later. Resources will need to be found to improve this.
The Debt Management and Banking team (DMB) has a very difficult role. A particularly difficult, and arguably the most important, part of the team’s work is extracting tax from those who have no intention of paying. Unfortunately, RTI has caused numerous erroneous PAYE debts to be generated, resulting in DMB lacking confidence that any PAYE debt is due. Its frontline staff now seem resigned to making wasted visits.
Agents do not have access to the Liabilities and Payments viewer – a source of irritation when dealing with Debt Management, who also cannot see the details behind the debt. HMRC is working on providing access but that will only solve part of the problem. The viewer needs improvement so that it is clear what the original submissions and payments were, what specified charges have been raised, what reallocations have been made and when these actions occurred. In the short term, HMRC should stop allocating tax payments across tax years to simplify the reconciliation process.
Agents and HMRC have differing perspectives on RTI. HMRC views RTI as a great success – nearly all employers are reporting under RTI. The perspective of many agents is the opposite, though, because of the increased administration, the delays in resolving problems, with no clear sign of the promised improvements and all at a much greater costs than estimated by HMRC. Such different perspectives are again probably both correct.
Edward Troup, HMRC’s tax assurance commissioner and permanent secretary, when giving oral evidence to a Treasury committee on 14 October 2014, answered the question: ‘So the machinery is not busted?’ as follows: ‘It is not bust, because it is working and we are collecting huge amounts of income tax and NIC through it. So if you think that HMRC is here to collect tax, we are doing a good job with the machinery you have given us.’
This is, in the author’s opinion, true. HMRC had a challenging timescale for the implementation of RTI imposed on it by the introduction of universal credit. Getting nearly all employers reporting under RTI is a colossal achievement, but this shouldn’t be the only measure of success.
As well as supporting the operation of the universal credit, RTI was intended to improve the operation of PAYE and to reduce the administration for employers, employees, agents and HMRC. Where is the evidence that it has improved either the operation of PAYE or reduced the administration? The promised savings from RTI have not yet been realised. Although HMRC receives the data, it is not being processed efficiently. HMRC staff are not fully trained to deal with RTI, and HMRC has not amended its processes to maximise the benefit of the new regime.
The implementation cost for business is also far in excess of HMRC’s estimates. Ongoing problems with processing and using the information are creating further costs for business and tying up HMRC resources. I have been told more than once by HMRC that the RTI project has come to the end and that there is no more money. It is now, to use HMRC’s phrase, ‘business as usual’.
We should not accept these inefficiencies as ‘business as usual’. RTI is not yet meeting the original aims of the project. HMRC needs to be more open about the problems and develop solutions to generate the operational efficiencies initially envisaged, for the benefit of all taxpayers. Penalties will be issued in January for larger employers; their initial implementation was delayed, in part due to problems with issuing generic notifications. This is only likely to add to HMRC’s difficulties with appeals having to be dealt with.
In reality, we are still in a pilot phase, and it is premature for HMRC to talk about it being ‘business as usual’. Until HMRC is more open about the problems, more investment is unlikely to be forthcoming and RTI will only remain a success from HMRC’s perspective and not for all taxpayers.
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