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RTI penalties: A drama or a crisis?

14th Feb 2014
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Who would have thought that attempts to reform the 60-year-old PAYE system would produce a week of such high drama, writes John Stokdyk.

Minutes before AccountingWEB’s Pick of the Week ebulletin was due to go out the door on Wednesday morning, my mobile phone started buzzing with calls, text messages and emails alerting me to an announcement from HMRC that it was “staggering” the introduction of automatic penalties for late PAYE payments and late submissions within the real time information (RTI) system.

The announcement related directly to a item we had lined up explaining the confusion and anguish caused last Friday by a deluge of warning messages that went to people who thought they had successfully filed their January RTI returns.

We just had time to tweak the story before the bulletin went out the door. The response was massive - the article jumped straight to the top of our “Most read/Most commented” charts as resentments that have been simmering for the past year came to the surface and members vented their relief and/or scorn about HMRC’s change of tack.

The vitriol the new RTI generic messaging service (GNS) provoked was partly down to the horrible realisation that come April those messages could be accompanied by automatic £100 late filing penalties. The clue was also the acronym. The same message was received by members who filed their RTI returns for a wide variety of payroll scenarios.

HMRC’s explanations were just as generic. The one useful piece of advice coming out of its PAYE helplines (if you could get through) was to ignore the messages because they were incorrect.

On Tuesday HMRC gave us an official statement (originally dating from 10 December) saying the notices were intended to be helpful reminders for employers who hadn’t submitted the expected number of RTI returns during.

The notice could arise, it added, when an FPS was sent in advance, for example by a sole director/employee planning to take the same earnings each month who submitted 12 FPSs in April for the full year. HMRC also said it had sent notices where it received an Employer Payment Summary (EPS) before mid-October 2013 reporting a period of inactivity, the example cited in this case was an employer who sent an EPS in August 2013 to report a period of inactivity from September.

Neither of these explanations had any relevance for most of the recipients who came on to AccountingWEB to complain about the 7 February messages. Nor did the statement bolster confidence in RTI. Professional bodies and business groups were right to urge the tax department to rethink its penalty timetable and HMRC is to be commended for listening to them and introducing a concession.

As well as drama, the events of the past week included an element of the slapstick comedy to which HMRC’s IT contractors and managers are so strangely prone. But their ineptitude raises a number of questions:

  • First, rather than being “generic”, surely any messages coming out of HMRC’s computers should specify the condition that triggered the alert?
  • More worryingly, why didn’t someone at the department take a moment to consider the scale of the GNS messages being generated and check the validity of a small sample before letting them out to cause aggravation for those who had to tidy up its latest GIGO [garbage in, garbage out] outbreak?
  • And what mechanism is HMRC using to assess the expected number of RTI returns? There is no regulatory basis I can think of for HMRC to set an expectation level for payroll returns. “On or before” has already caused trouble for a lot of businesses. But have we really got to the point where a tax liability can be triggered by an estimate of what HMRC’s idiosyncratic computers think it should be? And remember, even though you won’t be paying late filing or payment penalties for any outstanding amounts, you will be paying interest on any outstanding sums from 6 April 2014.

We’re still waiting for answers to these questions, but HMRC has been in lockdown mode before and since Wednesday’s announcement.

The stakes are very high indeed, which is why HMRC is playing cards so close to its chest.

However, the more HMRC fails to explain why people in the field are experiencing so many reconciliation problems, data duplications and confused communications, the more we have to consider the doubts raised by colinb and others on AccountingWEB that RTI is actually working properly.

A lot of AccountingWEB members have already made their minds up about that. To be fair just as many are willing to give HMRC the benefit of the doubt and a chance to iron out the kinks in the next 6-12 months.

But if HMRC is trying to bluff its way out of trouble, it risks causing even more damage to its credibility, not to mention its ability to calculate and collect the right amount of tax.

The National Audit Office has already highlighted the risks associated with the unrealistic RTI project timetable and weaknesses in HMRC's RTI accounting system. and where the auditors lead, the Public Accounts Committee and mainstream press are sure to follow. Rather than wait for all hell to break loose in the summer or autumn, HMRC could diffuse the drama now by opening up about the problems being encountered.

The department might find that there are large numbers of accountants, business people, software developers and even journalists out there who understand the various challenges posed by RTI and who genuinely want to help HMRC find workable solutions.

We might miss the RTI soap opera, but did anyone ever expect or want to make drama out of PAYE? 

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Replies (6)

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By petersaxton
14th Feb 2014 21:42

If HMRC think they should charge penalties

when taxpayers get things wrong it must be fair that they pay compensation when they get things wrong.

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By ShirleyM
14th Feb 2014 21:49

I agree, Peter

The problem is, as HMRC is a government body, the taxpayers would be paying for their mistakes.  Maybe employee (or management) penalties are the answer? They can all buy PI insurance to cover their mistakes, or maybe do free overtime correcting their errors?

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By petersaxton
14th Feb 2014 22:29

The taxpayers benefit

from the penalties, too.

So, I don't think it is a problem. The penalty that HMRC employees should suffer is the sack.

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By Kate Upcraft
16th Feb 2014 16:01

Is it really a penalty delay?

John

Thanks for taking time to try to bring out blinking into the daylight some of the issues with RTI. I was a member of the external stakeholder customer user group that was disbanded from meeting face to face with HMRC in January 2103 before RTI went live. In desperation in November I got some of that group together again as we were all troubled by the impact on our clients from incorrect and aggressive compliance activity based on corrupted data within HMRC’s RTI systems.

Since then a small group of us have been trying to get HMRC to understand the impact that RTI is having on employers, agents and annuity providers. Our payroll software providers really stepped up to the plate to deliver RTI to the specification we were provided with. Sadly the combination of rushed design by HMRC because of DWP’s universal credit rollout (that never happened) and the decision to bring in a new accounting system at HMRC that the Customer User Group never had any input into (or even information about) has led to the position we now find ourselves in.

We have employee/pensioner data being duplicated on receipt such that PAYE schemes liabilities are overstated. This incorrect YTD data is then used by the accounting system that then triggers phone calls, letters and now increasingly bailiff visits to collect payment that simply isn’t due for employees that don't exist. From an employee/pensioner perspective any duplicate that isn’t spotted by HMRC can lead to an incorrect BR tax code on the basis that the individual has two jobs/sources of income in the same scheme.

It was this corruption of data that led us to lobby for the delay in penalties but readers should be aware of what last Wednesday’s announcement leaves on the statute books:

A late filing penalty if the last FPS/EPS for the year isn’t sent by 19th May 2014, although you can't submit an FPS after 19th April as it will be rejected as this is new year end deadline. The 19th May is a concession for the last time as you can file an EPS after 19th April to close the year down, using HMRC’s filling software Basic PAYE Tools if your software can't do that. The penalty is calculated on the basis of £100 per 50 employees and accrues for each month (or part month) that a return remains outstanding after 19 MayAn inaccurate return penalty, as legislated for by Schedule 40 of the Finance Act 2008 which amended Schedule 24 of the Finance Act 2007, if any FPS for the year is found to be inaccurate on the basis of careless or deliberate errors.  HMRC may issue one penalty notice for inaccuracy penalties for multiple tax periods in a year. The penalty rates for inaccuracies can beup to 30 per cent of the potential lost revenue if the inaccuracy is carelessup to 70 per cent of the potential lost revenue if the inaccuracy is deliberateup to 100 per cent of the potential lost revenue if the inaccuracy is deliberate and the person attempts to conceal itThe surcharge (a penalty even if it isn’t called that!) for failing to pay in full and on time that has been in place since April 2010 and is calculated at the end of the tax year based on the number of defaults in a year, the first default being unpenalised. It is this penalty that was due to move to a monthly calculation from a tax year calculation. So the ability to levy a penalty that is a % of the underpaid tax that rises as the default increases and is accompanied by an additional penalty at 3 and six months can still be levied at the end of 13/14 and 14/15. How this will be assessed given the liability data is corrupted for many schemes is a mystery to me. My view is that this penalty too needs to be abandoned for 13/14 and 14/15 unless and until HMRC can amend the flaws in its RTI and accounting systems   

As John rightly points out we will even be charged daily interest on those incorrect liabilities that will never be paid by the schemes to which they are applied. So presumably the new online appeal system that is still headlining on the HMRC website will still be needed to appeal incorrect interest calculations, late filing penalties for 13/14 and incorrect surcharges,

Delay, what delay?

PS don’t even get me started on the new Employment Allowance that from April 2014 requires schemes to legally underpay their employer NICs by up to £2000!

Kate Upcraft

trying to lead the RTI taskforce and stay sane!

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
18th Feb 2014 10:47

I'll add my views

First can I say that the penalty delay is down to the hard work of many volunteers who have prepared and presented evidence to HMRC that now is not the time to bring penalties into the RTI regime; at best they will be a distraction, and at worst could cause absolute chaos. These groups include the Customer User Group, which now also has a taskforce working with HMRC to try to resolve the detailed problems arising. Also working hard for little recognition is a ministerial task force made up of practitioners and payroll professionals who advise the Minister directly on these issues.

Many professional bodies and trade groups made representations on this subject too, and the Admin Burdens Advisory board made recommendations to the Minister in the run up to the announcement. I think the consistent message played in through a wide variety of channels carried enormous weight. This is quite a considerable development, and was a brave and sensible mood by HMRC and the Minister. This clears the way for the hard work to continue to resolve some of the problems Kate has referred to.

Personally, I am less interested in the gloomy picture than I am in working closely with HMRC to resolve these issues as quickly as we can, and Kate, leading the Taskforce really has her work cut out. Some of the issues that need to be resolved will take more resources than are available, and I worry that no more will be released to get this project properly on its feet.

There are two key issues which really concern me - one of which Kate has alluded to. The first is HMRC's accounting system. Here, I refer not only to their "back end" systems, which seem to be a law unto themselves - and also seem to be some sort of state secret, so that when an employer is trying to sort an issue they cannot be told what the HMRC person is seeing, only that it differs from the dashboard; not only that, but also the issue that the dashboard is only updated twice a month. That to me beggars belief, when employers are required to report in real time, but HMRC only twice a month.

I understand that more work is being done on the back end systems, but suspect that the dashboard issue will not be resolved until we get the new "Tax for my business" screens, which are part of the Digital Exemplar. It is quite reasonable that HMRC does not allocate resource to something which is to be replaced, but we should not be in this position.

The second area is of more concern. Very early on, HMRC committed to "real time" rather than monthly reporting. In my view, there was no real necessity for this. All it achieves is spreading the processing load both for HMRC and DWP. I don't think HMRC would have had capacity issues if they had made it "When you run your payroll but at least once in ever tax month". Large employers who run a weekly payroll would continue to file weekly, but we would have had no need for repeated easements to deal with the issues for smaller businesses.

Still, we have a relaxation until 2016 to enable small businesses to adjust to the new regime. This is something they are not able to do at bearable cost. Giving them two more years, or even twenty more years will not resolve this issue; the costs are too great for small businesses to bear. Monthly reporting is a significant increase for those who were able to report quarterly, and that should be where this stops.

Of course this does undermine the "real time" bit of RTI, but surely forcing a small business to run payroll more often than is necessary to meet your statutory tax obligations (outside of RTI) seems to me to be a step too far in imposing burdens on tiny businesses.

 

So the first of my worries can be addressed, but the latter would take a very brave person to admit that they got it wrong. And the DWP of course would have resource implications - but which is the greater cost to the economy? We have businesses doing things just to keep Government departments happy and that cannot be a good thing.

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By peterdell
18th Feb 2014 17:37

RebeccaBenneyworth

Thank you very much for all your hard work it is appreciated and hopefully you will get properly rewarded in time.

 

 

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