Payroll practitioners understand very well the importance of complete and accurate data in their payroll systems, particularly data that is submitted to HMRC.
But it isn’t always easy to keep this data up-to-date, particularly when it comes to employee addresses. In this article, we review exactly what HMRC requires and why it is becoming increasingly important for employers to get addresses right.
Introduction
Cast your mind back to 2013 and the introduction of Real Time Information reporting. It brought a new focus on the accuracy of data in payroll systems and HMRC encouraged organisations to clean up employee details, particularly addresses, before sending them across in first submissions. But once the alignment process was complete and RTI became ‘business as usual’, HMRC only wanted new starters’ addresses and was not interested in address changes for existing employees. This changed from April 2015 when HMRC realised it needed accurate, up-to-date addresses to determine Scottish taxpayer status. And soon, HMRC expects to use employee addresses for the apprenticeship levy, meaning employers will have their own reasons for wanting HMRC to have accurate data.
So it is worth reminding ourselves at this point of HMRC’s requirements and considering why holding accurate addresses can be trickier than you might think. But first, why does it matter?
Why addresses are important
Technological advances have increased the use of email and online services so it is easy to conclude that addresses are less important now than they once were. However, HMRC uses them in several areas, some of which are or will be important to employers too.
HMRC uses employee addresses when aligning its records with the employers. The bulk of this alignment happened when RTI started, but each new starter needs to be matched and address data is an important part of that process.
If the employee does not know his or her National Insurance number (NINO) and doesn’t have any official documentation that includes it, then HMRC will use the address (and other fields) to find a match within its system and will send the NINO to the employer. The NINO is, of course, the employee’s primary identifier for all tax and NI dealings with HMRC and some other government departments.
In 2015, HMRC started using the address of the employee’s main residence to identify taxpayers who would be subject to the Scottish Rate of Income Tax (SRIT). From an employer’s point of view, once the S prefix tax codes are in the payroll system, Scottish taxation currently has little impact, but when rates and thresholds diverge in the future, there will be cost implications and added complexity in tax calculations and reporting. Therefore, the importance to employers of accurate employees’ addresses will grow.
A bigger impact for levy-paying employers’ will happen with the introduction of the apprenticeship levy in April 2017. When HMRC has collected the levy from each employer, it will distribute it proportionally to the skills funding agencies in England, Scotland, Wales and Northern Ireland to spend on apprenticeship training. HMRC plans to base the proportions on the number of employees resident in each nation, according to its records. If the employees’ addresses are distributed, for example, 60% in England, 10% in Scotland, 20% in Wales and 10% in Northern Ireland, then HMRC will direct 60% of the employer’s levy payment to England, 10% to Scotland, and so on.
HMRC is expected to calculate these proportions in early 2017; more details about the process are expected in October 2016. Will this be an annual determination, or could HMRC do it more frequently to reflect staff movements such as acquisitions and mergers during the year?
What if the employer’s distribution of employees across the UK does not coincide with the locations of the apprenticeships that the employer wants to fund? In England, employers will have a digital account to spend directly on approved apprenticeships, which the government will top up by 10%. That money might run out or be left unspent if it doesn’t match their apprenticeship needs in England. (We don’t yet know whether funds distributed to the other nations will be spent centrally or allocated to employer accounts.)
So, with the apprenticeship levy, employers with employees in England have a much larger stake in whether their employee’s addresses are accurate because errors will affect what funds they have in their English account and how much top up they receive.
Why address data is tricky
Address data can be tricky, starting with which address is required. In payroll, we generally only use one – the employee’s home address – and send this to HMRC, which asks for the ‘main residence’. But if the employee database is shared with HR, for example, then other employee addresses might be held, such as an alternate postal address, temporary accommodation while working elsewhere in the country, the overseas home address of secondees, or next of kin addresses. The first address in the system might have been entered at the recruitment stage.
And a shared database means data is input by people in other departments and possibly by the employee, too, through a ‘self service’ system. Do they all appreciate the importance of the ‘main residence’ for HMRC? If this vital address is not input by payroll, how can payroll ensure that the data is fit for purpose? Are there procedures in place to ensure that the data is reviewed and corrected, if necessary?
And it doesn’t stop there. With HMRC’s introduction of Personal Tax Accounts, it is becoming easier for employees to update their details directly with HMRC. So what happens if the employee gives HMRC one address while their employer sends HMRC a different one from the payroll system?
Correct address formats
HMRC publishes the address field requirements on GOV.UK and in detailed specifications for software developers so that they and payroll practitioners know exactly what HMRC requires in the FPS submission. How that transcribes to the payroll system as viewed by the person inputting the data depends on the design of the system, but the basics should be the same everywhere.
The FPS address consists of six fields (data items 13 to 18): four text lines, postcode and country. The first two lines of the address are mandatory. The postcode field is used for UK addresses only and the country field is for foreign countries only, so put non-UK postal codes, the Channel Islands or the Isle of Man in one of the text lines.
The fields might differ onscreen in the various payroll systems; a line might be specified for the town or city, for example, but the system would ignore blank lines when transferring the data to the FPS file, so that the first two lines are populated.
It is interesting to note that HMRC does not currently require UK addresses to include the nation – England, Scotland Wales or Northern Ireland. Anecdotal evidence from some of our Scottish members suggests that HMRC has struggled to identify all the Scottish taxpayers, which might be due to address data so perhaps HMRC’s FPS requirements will change for distributing the apprenticeship levy. We’ll know more after HMRC’s deliberations. If you choose to include the nation, it must go on one of the text lines, although your payroll system might be designed to recognise and move these if entered in the country field.
Although employers must send addresses to HMRC in every FPS, employees can give address changes to HMRC as well. So what happens if these differ? Guidance in relation to Scottish taxpayer status says it is the employee’s responsibility to inform HMRC of address changes, and even asks employers to encourage employees to update their addresses. So we conclude that HMRC uses the address provided by the employee, where they differ.
Tips for getting it right
First, find out who actually inputs the address that ends up in the FPS. If it isn’t payroll, make sure they understand the implications of which address to input and how to input which pieces of data, especially if you expect to have non-UK addresses.
There’s a danger that employees encouraged to update addresses with HMRC directly might not think it important to tell their employer too or may assume that the information is passed on. So encourage employees to tell payroll or HR, or use the self service system. Also, make sure there’s a system in place for employees to review their personal details regularly.
Understand how your payroll system transfers each line of the address to the FPS file. If your system allows field labels to be customised, make sure any customisation doesn’t undermine the transfer to the FPS file.
If you have employees living in Scotland who think they should be a Scottish taxpayer, ask them to check the guidance on GOV.UK and then contact HMRC.
Above all, watch this space! When further guidance about the apprenticeship levy is published, whether that concerns addresses or the devolved skills agencies explaining their funding arrangements, you can be certain that the CIPP, business advisors and other commentators will be poring over the details and highlighting them to you.
