A recent high court judgment is of huge importance to many low paid individuals and has implications for the payment day for which employers report employees pay under RTI.
Four single mothers, supported by the Child Poverty Action Group and Leigh Day Solicitors, challenged DWP’s use of RTI earnings’ data in calculating their Universal Credit (UC) award. The substance of their claim was that the DWP had misinterpreted the UC regulations.
The DWP refused to consider that two set of earnings, which had been reported in the same UC assessment period, could be allocated to the assessment period which the earnings were paid ‘in respect of’, rather than when the money had actually been received.
All four individuals were paid monthly at the end of each month, and had a UC assessment period that fell at the end of the month. For those UC, every claimant has a personalised award period based on the date of their first UC claim. Each claimant is allowed to retain a work allowance of £192 from their earnings in an assessment period. Any excess earnings remainder tapered away the UC paid at a rate of 63p of UC for every £1 earned.
One of the claimants, DJ, had an UC assessment period which ran from 30 November to 29 December 2017. She was paid on the last banking day of the month. We don’t know if that was when her pay was contractually due, and that fact is crucial to the case.
DJ was paid her November 2017 salary on 30 November 2017 and her December 2017 salary on 29 December 2017, so both payments fell into one assessment period. Under the UC rules DJ was allowed to keep just £192 and the taper was applied to the two months’ earnings.
In her next assessment period from 30 December 2017 to 29 January 2018, DJ was treated as having no earnings, as her January salary was due to be paid on 31st January. Her contractual pay date was the last calendar day of the month.
DWP refused to reassess DJ’s salary paid in December, for the January assessment period saying the earnings had been accurately reported by her employer. Her employers said they couldn't move the pay day to avoid this happening in the future. The employer did not need to change the payment date; the problem is about the reporting of the pay, not the actual payment date.
Crux of the problem
The issue of pay frequencies and UC has been recognised since RTI was introduced in 2013. However, there has been a consistent lack of clarity to employers about how to correctly report the pay data for both tax and UC purposes.
In the Full Payment Submission (FPS) there exists a tax week/month appropriate to the payment being reported and a field entitled ‘payment date’. Some parts of HMRC use the tax week/month in their internal systems, others use the payment date. The DWP only looks at the payment date field.
Four times a day the DWP request from HMRC any earnings that have been reported with a payment date that falls within the assessment period for any individuals who are UC claimants. As HMRC found two sets of earnings for DJ in her assessment period these were correctly passed to DWP. However, the second payment should have been dated 31st December as this was the contractual payment, rather than 29th December, in which case it would have fallen in the January assessment period and there would have been no issue for the court to consider.
HMRC’s further Guide to PAYE and NICs CWG2 at paragraph 1.8 outlines this approach. If the contractual payment date falls at a weekend or bank holiday, and actual payment is made on the first banking day before the contractual pay date, the date reported in the FPS must be the contractual payment date, not the actual payment date. This instruction has been in place since 2013 but is frequently misquoted by HMRC.
In the August Employer Bulletin the following statement appeared (my highlights):
“It is therefore very important to report your payroll accurately and on time, as changes in earnings can affect the amount of UC your employees receive. The payment date you report on your Full Payment Submission (FPS) should be the earlier of the date an employee is paid or the date they were entitled to that payment, not the payroll run date, or another date from your payroll system.”
Having indicated the importance of accurate reporting, the next sentence is incorrect, it is not the earlier date, but the later contractual date that is correct and vital for UC purposes.
I asked HMRC to publish a clarification, which they did in the next Employer Bulletin in October:
“When a regular payday falls on a non-banking day (Saturday, Sunday or bank holiday) and because of this payment is made on the:
- last working day before the regular payday
- next working day after the regular payday.
For PAYE purposes the payment may be treated as having been made on the regular payday. This is also the date that should be reported on the Full Payment Submission (FPS) as the ‘payment date’ even if the actual payment is made slightly earlier or later.”
In December’s Employer Bulletin HMRC reverted to sloppy wording again (my highlights):
- Submit your payroll on or before your employees’ pay day
No wonder DJ’s employers thought they were reporting the correct payment date and felt it couldn't be changed. They should have reported the pay date as the last calendar day of the month, whenever they paid on a Friday ahead of a weekend or bank holiday calendar month end.
One of the other employers also refused to amend the FPS payment date. Both of these employers are large public sector bodies. If they are confused, in spite of their highly resourced and knowledgeable payroll departments, it is no wonder that small, private sector employers may not be reporting the pay day appropriately.
I recommend four action points to sort out this mess:
- DWP and HMRC need to agree new clear guidance for employers and agents.
- Those departments need to jointly decide whether an additional date field ought to be included in the FPS to indicate contractual payment date. Some payroll software packages may need to indicate the actual banking date in their software, as they don’t currently hold the contractual payment date.
- Decide what is to be done when payment is brought forward to even earlier than the first banking day, as routinely happens at Christmas.
- Make it clear that for payments due on 6th April 2019, which is a Saturday where these are brought forward to Friday 5th April, the payment date must read 6th so that the payment is treated throughout HMRC as for month 1 in 2019/20 not month 12 in 2018/19.