Rebecca Benneyworth examines the pros and cons of proposals to streamline the payroll system.
As anticipated, the coaltion government’s ideas to reform the PAYE system are provoking howls of protest from the software and payroll bureaux industries, whose businesses may be all but wiped out by the proposal.
Under the second phase of HMRC’s plans to create a “centralised deductions” system, the tax department would assume the responsibility for computing PAYE, NIC and student loan deductions from payments reported gross by employers. The employer would compute the gross pay and be responsible for non-statutory deductions such as union subscriptions and pension contributions, as well as with statutory payments such as SSP and SMP.
The employer would then forward the funds to meet gross pay to a centralised deduction unit, which would compute the deductions and forward the net pay to the employee’s bank account. The balance would be retained by HMRC.
Under the new system, employers and employees would not need to worry about tax codes (saving millions of costs every year), nor would change of employment data or the annual P60 forms be needed; these would become HMRC’s responsibilities. These savings, as well as working out the net calculations and annual reconciliation, would relieve employers of a significant administrative burden.
But this change is a huge step and would need careful consideration and testing. The discussion document does recognise that there are potential problems, particularly for employees who will need to know whether they should contact the employer or HMRC about a query.
Mentioned in the June Budget material and now fleshed out in more detail, HMRC’s proposals for radical reform of the PAYE system are built on the back of the new computer systems introduced over a year ago, known as NPS. It is clear that the system design of NPS was intended not only to overcome the issues with legacy systems, but to provide a stepping off point for much more radical reform of a system that has been in place for over 60 years.
The discussion document (128kb PDF) on the changes sets out two stages that could be phased in over quite a short period – possibly 2-3 years. While employers and HMRC could enjoy significant savings, the software industry and payroll bureaux would be frozen out by the centralised deductions regime.
The first phase of the PAYE reform project is less controversial and concerns the provision of real time information when payments are made to employees. This approach would obviate the need for annual returns (although forms P11D would still be needed) and would reduce work in reconciling the tax position of individual employees after the end of the tax year.
About Rebecca Benneyworth
Rebecca trained in London with Kidsons and, on qualifying, spent some time as Chief Accountant of a manufacturing company. She now has her own small practice in Gloucestershire that comprises of owner managed businesses and small companies.
She also lectures extensively for a range of professional bodies, accountancy firms, commercial organisations and the Inland Revenue. Demand has grown for Rebecca on the lecture circuit where she is well known for her refreshing, enthusiastic and entertaining presentation style as well as having a practical and down-to-earth approach to tax.