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The impossible call on RTI penalties

18th Oct 2013
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Who pays for PAYE?

The introduction of RTI messaging by HMRC from next Monday, 21 October, known as the Generic Notification system, 6 months before RTI financial penalties commence in April 2014, is a warning call to employers and payroll providers alike. You’ve got just 6 months to tighten up RTI compliance processes, or expect to pay penalties, is the message HMRC is spelling out in black and white. A message that’s set to arrive automatically in payroll software. But when things go wrong and financial penalties apply, whose responsibility are they where payroll is operated by another: Client or Practice? Employer or Payroll Provider? Bluntly, who’s liable and who pays?

At one level, on the strict point of legal liability, the answer is obvious. The Employer is liable and it’s in the employer’s name after all that HMRC issue the penalty. But the matter is very far from being this simple: a reason why this whole thorny issue risks proving so contentious for the accountancy profession. While the strict liability to pay penalties rests with the employer, both the capability to report PAYE in real time and the responsibility for doing so rest with practice payroll or payroll provider. More simply, the employer is paying for this service and this is where it starts to get very chewy indeed.

Only the payroll practitioner has the RTI payroll software and expertise to secure penalty free compliance, which is why the employer using their services is so dependent on their payroll provider.

Before PAYE was operated in real time, incurring a penalty for a late annual return was straightforward enough. In short, if you didn’t submit your return by a given date you could expect a penalty. The employer understood their obligation and knew what they had to do to avoid it and so these penalties were equitable. Payroll practitioners knew their clients understood this. Can the same be said of RTI?

Under RTI the employer can fulfil all their obligations as set out by their payroll provider and still face penalties. The sheer scale of RTI and the scope for automated penalties in what is a very complex real-time reporting infrastructure leaves the payroll provider highly exposed for all issues that arise. They are the professional intermediary that has accepted the client’s commission and cash to ensure compliance.

Whatever your view and experience of RTI to date, there have been sufficient reports of difficulties and challenges with RTI to conclude reasonably that the introduction of penalties will greatly add to the costs and stress of the payroll practitioner, who is caught in the middle trying to make it all add up.

Whether or not you believe there are systemic problems with RTI doesn’t alter the fact that - even if working correctly - the variables in the operation of payroll are so great as to cause discrepancies that require investigation. Although HMRC have investigated reconciliation issues, ruling on 26 September these instances are not due to HMRC systems flaws, the penalty issue remains. PAYE in real time is estimated to manage a monthly processing volume of 44 million employments and pensions payments. HMRC themselves accept that PAYE can never be entirely error free. In a system so big and complex to require fully automated employer notices, incorrect penalties are inevitable.

Generic Notifications starting now herald the start of RTI penalties in 6 months

The penalty notice is perhaps just the tip of the iceberg of a body of unfunded work, representing a hidden cost much greater than the cost of an HMRC penalty notice. It is the unfunded interventions to limit client cost and exposure to penalties and HMRC sanctions the payroll practitioner has to undertake in order to preserve the client relationship, which represents the greatest risk to practice.

The maths of how much RTI issues could cost firms will obviously vary enormously.  As an example, let’s say that a practitioner charges clients fixed fees of £5-£15 per month per payslip, giving average quarterly values of £90-£150.  If the time cost to the accountant of preparing the payroll is roughly £100 (say £25/hr. and four hours’ work) per month, the profit margin is very narrow.  If practice payroll then has to spend an hour on the phone to HMRC regarding “errors” in HMRC’s reconciliation of that payroll, the margin is virtually wiped out. Interventions taking 3-4 hours for client PAYE matters are increasingly familiar. Confronted with a Penalty Notice and an additional bill for the time taken to try and unpick the problem client responses of “can’t pay, won’t pay” seem depressingly certain.

Employers need the certainty of a fixed cost for the operation of their payroll - but so does their payroll provider to deliver the same service in real time, including the means to defend HMRC penalty notices and compliance checks. Without it, the accountancy profession in practice and payroll providers risk being bled dry and straining client goodwill, perhaps to breaking point.

What the public reports and coverage of RTI systems issues on all sides makes harder, is for payroll providers to maintain a strict line of “I am not responsible for this” when challenged by clients fuming at automated penalty notices. The duty of care argument, which is what makes this issue of responsibility so contentious, does make it difficult for payroll practitioners to take the line that they weren’t aware of any issues with RTI ahead of penalties starting in April 2014 that could lead to this strained conversation with clients from next year.

Many payroll providers have set out their pitch for payroll services by offering an RTI compliance solution, which is good news, but this confidence has to be backed up with flawless PAYE compliance measures that allow payroll providers to prove to clients and HMRC alike, that they and their clients are not in breach of PAYE real time obligations.

Fortunately, HMRC’s RTI BACS payment channel provides a fixed low cost solution to achieve a total audit trail that proves every aspect of PAYE’s operation, including: the submission of employer reporting ‘on or before’, timely payment of PAYE due to HMRC and even eliminating duplicate employments. (Payroll software only hashes the live employment.) HMRC’s stipulation that employers using the Direct BACS payment channel hash their employee payments provides a total audit trail for PAYE to payroll providers so long as they have access to a BACS payment service. It links every employee BACS net payment in each pay cycle to both payroll software and FPS reporting.

Where practitioners have an RTI BACS payment capability for their payroll clients, they have control and oversight and, crucially, proof that all aspects of PAYE are being delivered correctly. HMRC won’t argue with a hash code. Payroll can’t argue without a hash code, but more importantly practice and client won’t argue with each other where payroll providers can produce the hash code. It’s the ace in the argument.

CreDec is the RTI BACS partner of ICAEW, ACCA and ICAS and the UK’s only BACS provider to provide RTI hash codes directly to its service users as standard.

For more information on CreDec’s Payroll Direct Credit service please contact Client Services.

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