BCS, The Chartered Institute for IT Consultation Response to:

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1 BCS, The Chartered Institute for IT Consultation Response to: Discussion document on improving the operation of Pay As You Earn (PAYE) Dated: 20 September 2010 BCS The Chartered Institute for IT First Floor, Block D North Star House North Star Avenue Swindon SN2 1FA

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3 BCS, The Chartered Institute for IT The Institute promotes wider social and economic progress through the advancement of information technology science and practice. We bring together industry, academics, practitioners and government to share knowledge, promote new thinking, inform the design of new curricula, shape public policy and inform the public. As the professional membership and accreditation body for IT, we serve over 70,000 members including practitioners, businesses, academics and students, in the UK and internationally. We deliver a range of professional development tools for practitioners and employees. A leading IT qualification body, we offer a range of widely recognised professional and end-user qualifications. Page 3 of 11

4 Improving the Operation of PAYE Response to the discussion document published by HMRC on 27 July 2010: pagelabel=pagelibrary_consultationdocuments&propertytype=document&columns=1&id=hmc E_PROD1_ HMRC s closing date: 23 September 2010 Introduction BCS, The Chartered Institute for IT is pleased to be able to respond to this document and is grateful for HMRC in providing representatives to discuss the proposals at a BCS Payroll Group meeting. Summary The Institute welcomes the proposal to introduce real time information. It will improve HMRC s knowledge of individuals tax liabilities at the time the liabilities arise and make the Pay As You Earn (PAYE) system more up to date in both timeliness of information and use of technology. In turn this will improve the numbers of taxpayers for whom the PAYE system will have the correct tax deducted. The improvements to PAYE that affect employers resulting from the Modernisation of PAYE Processes for Customers (MPPC) programme have largely been to computerise the paper system introduced over sixty years ago. The PAYE system of tax withholding and avoiding the need for the majority of taxpayers to deal with HMRC is not fundamentally unfit for purpose but rather unable to cope with the different shape of employments in the UK today. As the discussion document proposes changes to the underlying information exchanges it addresses the needs of the functionality of the PAYE system in the twenty-first century and thus can provide benefits to employers, employees and HMRC. The Institute sees the value to HMRC and taxpayers of a centralised deduction system while recognising that a number of issues will need to be resolved and payroll practices changed. Employers would be absolved of a significant burden and the penalties that can be applied where an employer fails in this duty. The willingness to discuss centralised deductions and any alternative with interested parties is welcomed. The Institute would be happy to continue in dialogue with HMRC on all the proposals in the discussion document. Page 4 of 11

5 Specific Questions Chapter 4 HMRC would welcome views on the concept of Real Time Information, whether it would support the collection of tax through the PAYE system and the issues that would need to be addressed in putting it into effect. The Institute welcomes the proposal of Real Time Information (RTI) and recognises its value in improving the operation of PAYE especially for taxpayers with multiple employments or pension sources many of whom have low incomes and typically overpay tax during the tax year. The concept of RTI could enable HMRC to move from their current position of identifying changes in tax liability and taking corrective action anything up to a year or more after the event to as little as one pay period after the event. However, the benefit that this provides will only materialise if all sources of income affecting the calculation of an individual s tax position are updated to supply RTI. Three fundamental issues arise from the provision of RTI: the mechanism, its timing and adjustments. The discussion document proposes that the BACS communication is used. Although a very high proportion of employees are paid by direct credit into their bank accounts, this is not always achieved by the employer having direct connection to the BACS system. Many employers use their own bank to generate the transactions from details supplied from their payroll system. There is no standard format for this information as each bank has developed its own specification and consequently many formats (at least 14) are in use currently. If RTI is to be supplied via the BACS communications, it will be necessary for the individual banks to enhance their systems to incorporate the RTI data. It is recommended that HMRC encourages the individual banks to adopt a standard format for RTI supplied in this way and thus minimises the burden on payroll software developers. The format, one agreed, for the direct BACS communication could be used for this employer-to-bank transaction. Following the mandatory introduction of electronic filing of employer returns to HMRC, all employers or their agents have invested in EDI or internet facilities to meet this obligation. There is value in using these established communications channels which would remove the supply of reporting information to HMRC from the paying of employees and pensioners: the former would thus not jeopardise the latter. The discussion document proposes that RTI is supplied each time an employee is paid. This will mean information is supplied as is and would not reflect any adjustment that may be applied to an individual s pay. While this could be corrected in the next submission of RTI on the following pay day, it should be noted that the correction (either additional net pay to or a recovery from the employee) is often achieved outside the normal payment method (eg CHAPS or cheque instead of BACS). By providing RTI some (short) time after the payday payment, these adjustments can be accommodated in the RTI submission. A monthly RTI submission would provide this flexibility to employers, increase the accuracy of information provided to HMRC and still allow HMRC to identify employers liability to HMRC in a timely manner. The RTI data could be supplied with the BACS transaction to pay HMRC (as required by 22 nd of each month). This option would also remove the risk of paying employees being jeopardised by the provision of information to HMRC. RTI will be an additional burden on employers if they have to process payments to casual employees paid a small amount in cash through payroll. Even if a nil BACS record could be used for attaching the RTI data, this still creates additional work for the employer. Currently, low pay casual payments are not included in PAYE. There are likely to be issues with RTI if information is sent without Page 5 of 11

6 National Insurance numbers (NINO) and valid dates of birth: low pay casual payrolls are likely to be particularly prone to this. RTI will need to allow for adjustment transactions, which may reverse whole or part of the payment, or make an additional payment for the same pay period. It is not unknown for an employee to be paid under the wrong PAYE reference (causing duplicate NPS records?) which will require reversing out of one scheme into another. Because of the non-cumulative nature of national insurance contributions (NICs) and whenever a tax code is operated non-cumulatively, it will be necessary for the amendment transaction to rectify a tax period earlier than that of the rest of the RTI data. HMRC would like to engage with employers, payroll software providers and payroll bureaux to discuss how it would affect them and the likely costs to them and benefits that it might bring. There is clearly a capital cost of introducing systems to provide RTI. It is likely that this would be incurred by payroll software developers as a statutory enhancement cost and the effect on end users (employers) would be the postponement of other enhancements. In addition there will be recurring costs for the support and maintenance of the RTI delivery mechanism and the individual RTI records will be subject to some transactional charge. These recurring costs are likely to be passed on to end users according to whatever method is used for determining existing charges. Employers are likely to be nervous about RTI as they would rather make sure any information sent to HMRC is accurate. This is not always possible especially when the priority is payment on time, and even more so with the tight timescales for weekly payrolls. This will lead (certainly in the early stages) of additional effort on employers to comply with RTI requirements. If, as a result of RTI, employees are (more) correctly taxed on their earnings as they earn that income, then adjustments (particularly for underpaid tax) in subsequent tax years will be less and employers will not be faced with employees being impoverished as a result of the tax collected in any one pay period. Employers have a duty of care over their employees, arising from the master and servant concept, and will, from time to time, make hardship loans to employees in financial difficulty as a result of the employees tax liabilities. It is possible that when RTI is first introduced, it will result in additional tax code changes being issued to employers and while their operation may be automatic, employers are likely to require additional recourses in explaining the (frequent) changes in tax codes to employees. RTI should significantly reduce these obligations on employers once the provision of RTI is well established. Issues may still arise from weekly payrolls if RTI is provided each pay period. The very tight timescale for employers to pay weekly paid employees, from data gathering to payment processing are such that revised tax codes created by one week s RTI data will not be processed by the employer for more than one pay cycle and that create further amended tax codes. Some smoothing process will be needed to avoid an iterative process of unending tax code changes. Providing RTI data should eliminate the need for the Audit File as requested by compliance teams within HMRC. The informal nature of the audit file, its inadequate specification and its introduction without consultation with payroll software developers have all caused much friction between payroll software developers and their end users. Both the need for the audit file and the animosity can be abolished. Further benefits may flow to employers if the suggestions below are incorporated into the process once RTI is established. Page 6 of 11

7 HMRC would particularly like to understand how the system might be constructed to simplify the process for employers. Currently, an employer must notify HMRC of a new employee either when a tax code has been issued or when a relevant payment (of at least the lower earnings limit for NICs) is made to the new employee. The provision of this notification (on forms P45 and P46 respectively) is within the information provided by RTI and thus, were it to continue, a degree of duplication of effort by the employer. With HMRC s NPS system holding information by taxpayer rather than by employer as was the case previously, then it is difficult to see the need for the other information on forms P45 to be supplied by employers to HMRC except in the exceptional case where a previous employer has failed to provide RTI. Consequently, the process of notifying HMRC of starters should be revised to eliminate duplication. Employers should be able to notify HMRC of a new starter, regardless of earnings, by provision of only name and NINO either with RTI data or separately. A default tax code can be operated by the employer (as is the case now with the P46 process) and HMRC would be able to issue a tax code to the employer that reflects the employees tax affairs including any low but regular earnings. It turn, this would avoid underpayments by such low paid employees who have multiple jobs. Similarly, there is no need for the leaver notification from employer to HMRC as the date of leaving is in the RTI data. Any post cessation payments could then be taxed using the last issued tax code (as is the case with payments to a deceased employee s estate). This would significantly reduce the tax advantages of delaying termination payments until after a P45 has been issued and consequently, reduce the burden on employees, relieve unnecessary pressure on payroll staff and improve cash flow to the Exchequer. Any employee who leaves employment during a tax year is provided, on form P45, with details of taxable pay and tax paid with the old employer but no details of national insurance earnings and contributions are provided. The information on form P60 includes both tax and national insurance details but P60s are only provided to employees in employment on 5 April (and thus not to leavers). If the P45 leaver information is no longer required by HMRC, the P45 leaver information to employees could be replaced by providing a P60 to left employees (either after tax year end or on leaving). The notion of the P60 providing a full taxable earnings picture through the previous employment details is false for any taxpayer with concurrent employments. HMRC is interested to understand whether Real Time Information would offer a more cost effective means of collecting the tax and NIC deducted by employers. If RTI provides HMRC with details of all payments to employees during the tax year, it is difficult to understand the continuing need for information to be provided at year end as is required on form P14. As employers would still be responsible for paying over the tax, NICs and student loan repayments they have deducted, the P35 reconciliation will be all that is necessary at tax year end. As HMRC will have, from RTI, details of the monies due to be paid over by employers each tax month (or quarterly for small employers), HMRC will have the information for it to use its existing powers to chase and if necessary penalise employers for late payments. Some employers, especially small ones, may wish for HMRC to take over responsibility for the payment by initiating the transaction through a direct debit instruction. Both these opportunities are likely to promote more cost effective collection. Page 7 of 11

8 Annex A sets out the information that HMRC would need to be transmitted with each payment to an individual. HMRC would be interested in views as to how easy it would be to provide this information. To provide information already in a system is relatively straightforward as the task is limited to extraction, formatting and transmission. However, not all of the information contained in Annex A is necessarily held in computerised payroll systems. There is a small issue because the requirements for the paper P11 are different to the electronic equivalent to the P11. A more significant issue is hours worked as these may not be held at all (typically in monthly payrolls where a regular salary is paid each period) or held in a time and attendance system that only interfaces payable amounts to a payroll system. These issues are surmountable with reasonable effort. There is an inherent assumption that the data will always be right as no amendment facility is identified. It is common practice across most payroll departments for amendments to be made to payments for any pay period. This could be to include an additional item such as overtime (for example, because an interface was missed) or to stop a payment (for example, it has just been identified that an individual has left the employment). The adjustment may be related to one or many previous pay periods and could stretch across more than one tax year. It is of concern that the tax credit and welfare benefits administration systems could misinterpret RTI information as, for example, a back-dated pay rise, annual bonus payment or mistimed payment could be interpreted as a general rise in earnings rate. Conversely it would be easy to misinterpret someone taking unpaid leave as a reduced level of income. There must be concern for the effect on the employee/employer relationship if any information provided by the employer is misinterpreted by HMRC or other agencies. There is concern that the proposed use of current payment processes as the delivery vehicle has not fully accounted for the data cleansing, quality assurance and mobility aspects inherent in use of the Government Gateway and the risk that migrating these essential facilities into the payment processes poses. Following the introduction of Real Time Information HMRC would look to simplify processes in a measured fashion to ensure that employers and HMRC s systems were not overloaded. HMRC would be interested in employers views on which processes should be simplified first. The process for starters and then the process for leavers as described above. The starter notification could be augmented with some indication that the employment is the only one with the employer (or within the PAYE scheme) or a second or subsequent concurrent employment with the same employer. This would eliminate the problems arising from the use by NPS to attempt to identify new employments from the works number supplied by employers to HMRC. Page 8 of 11

9 Chapter 5 HMRC would welcome views on the Centralised Deduction concept, the assumptions made about its benefits to all parties involved in the operation of PAYE and the issues it would raise and how they might be addressed. It is recognised that with the current shape of employments in the UK that the only way the PAYE system can be more responsive to individuals circumstances is by using all the tax information on an individual every time a PAYE tax calculation is performed. Without breaching taxpayer confidentiality, this can only be performed by HMRC (or the individual taxpayer) so the concept of centralised deductions (CD) is the only realistic solution that avoids all taxpayers being forced into self-assessment. However, it places HMRC between the employee and the employer when the employee is paid. Under the current PAYE system, the employer acts as an agent of HMRC in the tax collection role but the employer remains in ultimate control of how much money an individual will have available to spend on each payday. This will be lost with CD and the employer s duty of care to his employees (in particular to ensure they are not impecunious) will be difficult to operate and open to abuse. The proposal makes HMRC a time critical aspect of the payment process so it is imperative that it is clearly defined how that responsibility will be met in the event of problems. Equally, the proposal does not define how the system is to operate in the event that an employer lacks the capacity to pass their payroll data to HMRC in an acceptable format. It will be necessary to establish who an employee should contact in the first instance should he or she have a query about net pay. This could be achieved by education of employees so that they know who to contact with particular queries but that is unlikely to very effective. Employers will cease to be able to provide the informal tax advice they currently undertake. Indeed, employers often act (willingly or otherwise) as a buffer between HMRC and employees who are otherwise unrepresented taxpayers. Problems with HMRC systems usually do not immediately impact on individual employees and are resolved by payroll professionals working with HMRC. However it is an entirely different matter if HMRC is effectively responsible for ensuring that every employee is the country is paid on time and accurately. Alternatively, employers could be provided with the tax, NICs and student loan repayments for each employee. However, this would mean CD replaces a one-step process: Employer calculates net pay by a five-step process: - employer calculates pay - employer sends information to HMRC electronically - HMRC calculates tax, NICs and student loan repayment - HMRC sends details back to employer - employer calculates net pay. But it does provide the employer with a sufficiently full picture to support all initial queries from employees and to address any requests for hardship loans. It is common for employers to make some payments free of tax, free of NICs or free of tax and NICs they promise the employee, regardless of his or her tax and NIC commitments, a fixed increase in Net Pay. To gross up these amounts correctly in all circumstances is only possible if the tax and NIC is being calculated as part of the grossing-up calculations. Many payroll systems do this as an iterative process which is both more complex and more accurate that the use of tax tables G and the guidance in FOT1. It is not acceptable to replace an accurate calculation by an approximate Page 9 of 11

10 calculation. Were CD to undertake grossing up then the marginal rate of tax of an individual with concurrent employments will vary according to when in the tax period, the grossing up payroll is processed. This would mean uncertainty for employers in managing their costs and, depending on how the grossing up is operated in CD, with one employer subsidising another. It is not clear how modified PAYE schemes would work. There may be an adverse effect on employers meeting the shortfall between hypothetical and actual tax liabilities. Employers will not be able to calculate the liabilities for tax in PAYE Settlement Agreements (PSAs) as they will no longer know their employee s marginal rate of tax (within the employment). However, the need for PSAs or some similar mechanism remains to ensure for example employees enjoy the full value of rewards for exceptional performance and are not out of pocket when required to relocate and incur (allowable) expenses in excess of the tax free limit. Attachment and arrestment orders (in all their fifteen different forms) are calculated on gross pay after deducting tax and NICs. It follows that they cannot continue to operate in their existing form unless they are calculated within CD. There are a number of detail considerations: Handling attachment orders is a burden on employers, but time spent includes answering queries about pay, dealing with deficient notices (eg sent with monthly deductions instead of weekly), notifying the issuer when an employee leaves. The actual calculation is, in many cases, not the main burden. There are a number of pieces of legislation involved, and often changes are not made in a timely fashion. Latest Scottish legislation requires letters to be sent which include details of payment made and Net Pay. Arrestment orders come from a wide variety of sources. Unless they are all sent direct to HMRC (in which case HMRC will incur significant costs in handling these) how will HMRC be notified to whom the payment should be made? It is uncertain how pension payments would be notified to pensioners. A pension advice is currently only issued when the net value changes by an amount determined by the pension payer. With the introduction of CD, the pension payer would only know about changes to gross pensions. HMRC would need to separately identify changes to net pensions and issue tax advices to affected pensioners. HMRC is interested in hearing proposals that could deliver a similar or better outcome through a different means to those outlined in this chapter. The Institute does not at this stage have any specific views on alternatives but has encouraged members to offer their individual suggestions so that due consideration can be given to each alternative. HMRC would like to engage with all groups of people who could be affected by this concept to discuss the practical advantages and issues to be addressed. The Institute would be pleased to engage and provide its collective expertise in discussions of all proposals that could improve the operation of PAYE for HMRC, taxpayers and employers. Page 10 of 11

11 Chapter 6 HMRC would like to hear views on data, resilience and availability issues raised in chapter 6. The discussion document requests feedback on a number of issues regarding data security and system resilience. All of those issues appear to be intrinsically dependent upon the style of communications established between the parties involved in the final operating structure so it is difficult to offer cogent feedback at this time. HMRC and its agents would certainly have access to the bank account details for all employees, otherwise they could not forward the payment details to the bank. Most employees, after the various cases of lost Government data in recent years and the rise in identity theft, would be most reluctant to have this information lodged with HMRC. Employers have a contractual requirement to pay employees on time this could be compromised by inclusion of a complex calculation between employer and bank, when transmission of data is already on a tight timescale. What happens, for example, if HMRC cannot match a payment to a taxpayer record? Other Comments The introduction of RTI would be an addition to the existing operation of PAYE and independent of the paying of employees and thus a low risk change. The introduction of CD would be a significant change to the operation of PAYE; it would require significant systems to receive information, undertake the calculations almost instantaneously and provide tax deductions information to millions of employees. There have been delays with implementation of large HMRC systems (e.g. NPS) and problems after implementation on many occasions. HMRC have not shown flexibility in responding to changed circumstances eg failure to implement D1 tax code for 2010/11, although it was known this minor change would be needed (in fact, software developers had to alter their systems to prevent use of D1 code, which would be automatically brought into use by addition of a new tax rate as described in HMRC s own Specification for PAYE Tax Table Routines). The Government does not have a good record in the delivery of large systems and employers would be nervous of placing the ultimate step in paying their employees in the hands of a government system. Late or inaccurate pay has led to employees taking industrial action. Ian Ryder Deputy Chief Executive BCS, The Chartered Institute for IT Page 11 of 11