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Dark clouds loom over payroll processes

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HMRC has two upcoming plans that will impact employers, or anyone who is processing a payroll. In 2025, they are mandating the reporting of employee hours via RTI and in 2026 they are mandating the payrolling of benefits. Ian Holloway looks into these plans and whether they will work.

12th Apr 2024
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In 2022 HMRC published a consultation on improving the range of data collected. HMRC, in 2023, then published the outcome, including a summary of the responses. 

This concerned the perceived gaps in the data that HMRC held for taxpayers. The options proposed, essentially said, if you gave us more data, we could do more with it at our end:

  1. The start and end dates of self-employment, via self assessment (SA) returns (previously voluntary but would be made mandatory);
  2. Dividends paid to shareholders in owner-managed businesses, via SA (again this would be made mandatory); and
  3. Employee hours worked via RTI (this would change the current way from reporting hours in bands to reporting actual hours worked in the pay period, subject to exceptions).

HMRC barely acknowledged the potential administrative burden of collecting and reporting more data. Even though requesting more information for the completion of an SA return doesn't seem overly burdensome.

However, it’s the complete opposite when we have to populate payroll systems with hours worked. The current bands have to be removed (hopefully with help from software!) and then actual hours worked if paid by the hour or else contractual hours have to be entered. Where there are no hours, for example if the employee is on unpaid statutory maternity leave, an exceptions field is completed. 

The (draft) income tax (pay as you earn) (amendment) [(no. ***)] regulations 2024 bring these increased data collections into force. They are open for consultation until 9 May 2024 and comments can be sent to [email protected]

These points should be considered:

  • How easy is it to get data from taxpayers to populate the SA return?
  • What impact will this increased data gathering have on my practice?
  • How easy will it be for employers to provide information about employee hours worked?
  •  How much processing time will this involve every pay period (when someone starts, leaves, changes hours, goes to maternity, paternity, sickness, jury service etc)?
  • How accurate will this data be when it is sent to HMRC?

We need to respond to this consultation on the draft legislation. Administration burden ahead – can you cope?

Payrolling of Benefits 

On 16 January 2024, unsurprisingly, HMRC announced, in a simplification update, the move to mandatory payrolling of benefits and expenses from April 2026. 

The last P11Ds will be for the tax year 2025/26. There will be a cliff edge mass registration of employers and from the tax year 2026/27, the notional taxable value of a benefit will have to be processed via payroll. Therefore, we are looking at the value of medical benefits, company cars, vans, accommodation, beneficial loans, assets transferred etc.

Accountants, bookkeepers and agents who process payrolls on behalf of employers have not been able to register their clients for payrolling but that is set to change. In the March 2024 agent update, it was stated that agents could register from April 2024. However, the March 2024 employer bulletin said that agents could register from May 2024.

It’s good to be able to have this facility, but let’s hope you tell the client before registering them because registration means the notional taxable value will have to be processed every time the payroll is run. 

The agent update said that if there are any comments on mandating the payrolling of benefits from April 2026, these can be sent to [email protected]

I think we need to comment, just think, for example:

  • Am I losing an income stream if P11Ds are going? It’s uncertain if anything will happen in that regard as HMRC seems to have made the decision that P11Ds are finally going;
  • Do you get the information every month from employers to enable payrolling? This involves scenarios such as an employee changing cars, taking out a new loan, using the company yacht, or preparing their will (possibly, a service supplied);
  • How does the information flow when there are changes? For instance, an employee going from single cover to married cover, reimbursing fuel costs for a company car, or keeping their dental cover for a period after leaving; and
  • If class 1A national insurance is calculated and paid in real time, converting an annual liability to a monthly/quarterly one, will this impact cash flow?

So many questions, so little time. 

Thoughts 

With regards to improving the data that HMRC collects from the SA tax return, I do not have issues here. Some clear guidance and good communication should enable that data to be entered – it is more data gathering, collation and reporting, though, and time is money. 

I am sceptical as to whether employers will be able to improve HMRC’s data by reporting hours worked for each employee each time they run the payroll. Sometimes, it’s hard enough to get essential RTI matching data like their full name and address, let alone how many hours they work. I fear employers will be rushed into this, resulting in incorrect or fictitious data being returned to HMRC which would undermine the intention of filling their data gaps.

On the other hand, it is perfectly understandable HMRC want to mandate the payrolling of benefits. Why this has been voluntary for so long was always a mystery to me and, believe it or not, I am an advocate of payrolling. 

HMRC has failed dismally in their push to get employers to move to payrolling by choice, so the easiest thing to do is take away the voluntary aspect. Yet, accurate payrolling requires the accurate provision of the taxable benefit or expense by the payroll deadline for processing. HMRC, please note this will not happen, to the extent we will not be able to correctly payroll benefits and expenses.

The result is incorrect taxation of benefits and expenses. This will cause employee upset and will be far from meeting HMRC’s intention of ensuring that taxpayers pay the right tax. If I were overseeing this plan, and thankfully I am not, I would mandate the phasing of payrolling, starting with the ‘most popular’ benefits where an annual value can be converted to a notional amount each pay period. I think it should start with medical benefits and then move on to the others.

Aside from anything to do with SA returns, I see disaster written all over these two plans – one effective April 2025, the other in April 2026. 

Maybe I will be wrong and this will work smoothly with employers and agents managing this and everyone will be happy. After all, thinking logically, it’s only one other change for us and change is something we handle well. The change to RTI was trouble-free, works perfectly for every employer and we are all happy with it, aren’t we?

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Replies (14)

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By Paul Crowley
12th Apr 2024 15:00

So much big brother stuff
Why does HMRC need hours for salaried staff? It seems to be collecting information for purely statistical reasons?
This has got nothing to do with collecting tax and NI from employees.

Thanks (15)
Replying to Paul Crowley:
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By ryanmillward
18th Apr 2024 17:58

Could they need this information to make sure staff are being paid minimum wage?

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By tom123
12th Apr 2024 15:47

Remember the bizarre furlough rules that bore no resemblance to day to day living - calculations including seven days per week rather than the usual five working ones..

Try as they might, HMRC will not be able to subject the calendar to metrication. Even on a bog standard 37 hour week year round - what would I report my hours per month as being? 160 1/3?

That's before you get onto things like term time only working, but paid over 12 months.

All the traditional industries like manufacturing, that used to have weekly payrolls built up from hours, have sensibly moved to salaries.

Complete waste of time - life just isn't this neat and tidy.

Thanks (15)
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By FactChecker
12th Apr 2024 18:51

The draft Income Tax (Pay As You Earn) (Amendment) (no. *) Regulations 2024 are prefaced by a few other 'fun' items ... in addition to the salient changes to Payroll on which Ian has rightly focussed.

Policy objective:
"to provide better outcomes for taxpayers and businesses" ... "the additional data HMRC will collect is in areas where taxpayers already hold the data"
So ... a dubious and unquantified intention, supported by an outright 'lack of truth'!

Impact on businesses:
"an estimated impact on up to 2.0 million PAYE-registered businesses" ... "one-off transitional costs of £58m" and "continuing impact on Administrative Burden of £10m pa"
(watch out for pigshit falling from the sky)

* The detachment from reality shown by HMRC is encapsulated in their summary:
"The employee hours estimate is based on assumptions about data employers are already required to keep, to satisfy National Living Wage and National Minimum wage rules, and how easy it would be to include that data in the regular RTI submission process they already follow."

Given the inaccuracy of that assumption (which fed the economic impact estimates), it is only too easy to see how badly under-estimated those costs are - and that is, as Ian hints, in the unlikely event that Employers don't just stop trying ... and instead fudge the reported figures!

Thanks (4)
Replying to FactChecker:
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By FactChecker
12th Apr 2024 19:11

Meanwhile, back in the land of practicalities, there is a rather obvious lack (one might say vacuum) of details from HMRC with regard to new field(s) in the FPS .. and the rules for determining the values to be submitted for them.

For instance (according to the draft Regs):
* Despite the references to 'Hours worked', you can only possibly report on 'Hours being paid' ... which as anyone who has wrestled with NMW will tell you are rarely the same thing.
* That apparent confusion may often lead to far worse confusion (especially if the data ends up being shared with others such as DWP).
For instance - where this month's pay includes pay partially for 'hours worked' over the last 3 months (due to late overtime claims or whatever), the FPS will correctly indicate all those hours being paid this month - but with the incorrect inference that they were all worked in that single month.

Basically - any reliance placed by HMRC or DWP on these figures, for 'policing' NMW or UC or whatever, will be both unreliable and therefore dangerous.

[FWIW I'm prepared to bet that more than one employer will report, say, 51 hours for a week where EE was contracted for regular 35 hrs and worked 8 hrs on Sunday at double-time.]

Thanks (5)
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By johnthegood
14th Apr 2024 06:44

payrolling of benefits - its hard enough to get the information once a year, difficult to see how we are going to get accurate information 12 times a year

Thanks (8)
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By paul.benny
15th Apr 2024 14:40

To all who respond here - comment here by all means but the article mentions a consultation - so express your concerns in the consultation.

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Replying to paul.benny:
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By FactChecker
15th Apr 2024 15:13

I did (to the supposedly 'open' Consultation, on these and a few other proposals, back in 2022) - which resulted (not my response on its own obviously) in them dropping a few wholly insane ideas but sticking to their determination to achieve the changes now set out in the draft regulations.

These changes (specifically the one re RTI on which this article focuses) are not going to work - in the sense, as I've set out above, that the figures generated will be unreliable and so unusable by HMRC or DWP for any logical objective.

So, although they may have published an email address for you to submit your comments, the HMS Consultation has long since left the harbour and set sail for lord knows where (since HMRC obviously don't know where)!

Thanks (4)
By cfield
15th Apr 2024 15:19

What a strange article. First you give us all the reasons why mandatory payrolling is such a bad idea, then you say you're all in favour of it! Well thanks for your personal opinion, but in future, please note all we want to hear are the facts, not your sixpen'orth. That's our prerogative!

Payrolling was eschewed for a good reason, namely that it's a right pain in the neck for small firms who form the vast majority of employers. Getting 3 months to file a P11D once a year is actually the easier option, especially with online filing. For large companies, however, it no doubt saves a lot of time and hassle at the year end, so the voluntary approach was right.

So if people choose not to do something voluntarily, the solution is to make it compulsory and force them to do it. That's the philosophy, is it? In other words, you only get a choice if you be sensible and make the "right" choice. We're not really a free country anymore, are we. Do you remember when they once handed out £825 over 5 years for online PAYE returns? Seems a world away now. That was in the days when it was regarded as not quite cricket to force all these constant changes down peoples throats. They've got a real taste for it now, compulsion.

I suppose the company cars and health insurance aren't too difficult, although it's a nuisance for clients with director-only payrolls who wish to avoid PAYE bills. I can see a big problem looming for beneficial loans, however. Clients with overdrawn loan accounts above £10k can avoid a P11D if they pay the HMRC official rate of interest based on normal averaging. Does it mean this now has to be done 12 times a year? So much for simplification! How about some sensible exemptions? In fact, how about some common sense for once? Not to mention some common decency!

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By petestar1969
15th Apr 2024 17:17

Payrolling BIKs for beneficial loans? That should be fun......

Imagine in August 2027 doing accounts for a company for year ended 31 March 2027.

You notice that in December 2026 they made a beneficial loan to a shareholder/director, which should have been payrolled at the time but wasn't.....

Deep joy.....NOT!!

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Replying to petestar1969:
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By MinimalDamage
15th Apr 2024 19:46

I think beneficial loans and living accommodation will still need to go on P11Ds, I think this was mentioned in the original HMRC announcement.

I also wonder how this will work from the perspective of potentially having to retrain staff. The last two places I worked at, payroll had nothing to do with benefits in kind and it was the tax department that would do these every year. I assume that the roles are reversed in some other practices. And who will the client go to to ask for advice?

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Replying to MinimalDamage:
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By petestar1969
16th Apr 2024 12:54

I hope you're right in your first paragraph, but its written in the article that 2025/26 will be the last year for P11Ds.....

Lets see what happens...

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By listerramjet
18th Apr 2024 11:27

Sounds like a clear breach of data protection principles. The purpose of collecting the data is nebulous at best.

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By The Rogue
18th Apr 2024 15:34

I agree that the information gathered will not be correct. Several people in my company have contracted hours but work more. Do we need a clocking in machine for all staff? I don't think anyone falls below NMW.

We pay in the middle of the month for the whole month so we will know what hours were worked in the first two weeks but won't know for the rest of the month. But we have to file RTI on or before the date that net pay hits employees' bank accounts because ... No I don't know why, especially as the HMR&C portal doesn't reflect any figures from RTI until well into the following tax month.

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