PAYE reform: The software view
Rebecca Benneyworth examines the pros and cons of proposals to streamline the payroll system.
As anticipated, the coalition 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 in 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 two to three 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.
The NPS is centred around an individual employee record for all employers, and thus could be self-reconciling throughout the year. Over and underpayments of tax would be identified promptly and highlighted automatically – a subject about which HMRC has received significant and repeated criticism.
It is also envisaged that information provided on change of employer forms (P45 and P46) could probably be dispensed with, and a date of starting or leaving just filed with the payment data, coding notices being triggered automatically to the new employer.
The discussion document also envisages this information being made available to the relevant authorities when the employees are benefit or tax credit claimants, reducing the requirement for claimants to make separate notification and speeding up adjustments to claims. This would only be done if the necessary statutory authority were in place, but it is expected that this could reduce fraud and error in the tax credits and benefit systems significantly.
Working patterns have changed, with employees moving between employers much more frequently, and in many cases carrying out several part-time jobs concurrently. At the moment, a great deal of time is spent every year in reconciling the payments made monthly (or quarterly) by employers with the annual return – form P35. Employers, pension providers and payers of taxable benefits and HMRC all spend significant amounts of time in merely providing information and checking it to ensure that the annual payroll submissions balance.
There is an additional benefit which accrues only to HMRC. When the new penalties for late payment of PAYE and NIC were designed, it became clear that the system could only work if there were monthly reporting of liabilities due. Without this, officers will need to visit those who pay late to identify the correct payments due and charge penalties accordingly; it is therefore clear that although the system has been implemented this year, it will deal with only the very worst cases of non-payment. When the idea of monthly returns was considered, it was immediately rejected on the grounds of the additional burden for employers. With regular real time information, HMRC could chase (and if necessary penalise) late payment much more effectively.
Automatic capture of information as payments are made has a number of merits. Clearly, additional work will be necessary for the software companies in engineering the additional data so that it can be provided, and the volume of additional data is quite considerable, but is all available within the payroll system (or on the P11 as the discussion document refers to it).
The data would be submitted when the employer makes electronic payment. Small employers could join in through the modification of the HMRC software available on the Employers' CD ROM – designed for employers with less than 10 staff. Clearly the provision of this information will be acceptable only in electronic format, but those employers who do not pay PAYE over electronically could be included in Real Time Information through use of the CD ROM. Mandation for all employers – with very small exceptions on religious grounds - would seem to be a given.
Subject to the concerns that software companies will raise about the speed of this change, and the issue about sharing and security of data being adequately addressed, the move to real time information is irresistible.
Provided adequate provision is made for small employers, it relieves employers of a major headache at the end of the tax year, and will allow HMRC to perform its function to ensure that taxpayers pay the right amount of tax – and to collect tax from employers – more effectively than ever before. It should save the taxpayer money too by streamlining HMRC's processes and removing unnecessary work after the year end. The consequent benefits for the tax credits and benefits systems should not be overlooked – again presenting savings for the taxpaying community.
The arguments put forward for real time information are difficult to challenge in terms of improving the current system and removing redundant work. I see no real difficulty in implementing this element of the reforms and then seeing where it leaves us, but as several AccountingWEB.co.uk members have already pointed out, centralised calculation of deductions could be a recipe for disaster.
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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,...