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RTI troublespots: Low paid directors

26th Feb 2013
Partner Rebecca Benneyworth Training Consultants
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AIA

One of the most frequently asked questions about RTI on AccountingWEB is what will happen under the new system to small companies that only have directors with no PAYE/NI to pay,  but who receive a small monthly salary.

“Are they really going to have to submit their payroll every month under RTI,” asked [email protected] in November.

In reply, 12Pay’s Tom McClelland came up with a succinct summary of the situation: “If the company has no employees above the LEL in any week, *and* P46s are held for all employees with boxes ‘A’ or ‘B’ ticked (ie you have a declaration from them that this is their only job), then you don't need a PAYE scheme.

“The moment a single employee exceeds the LEL in any week, or a single employee ticks box ‘C’ on their P46 or refuses to tick any of the P46 boxes, you must have a PAYE scheme and report all employees, regardless of pay levels, to HMRC. This is already the case.

“From April 2013 the reporting will be a full payment submission (FPS) for everyone on every payment if the employer has a PAYE scheme. You won't need to think about the status of employees once you've got a PAYE scheme; just pay them all the same way, and (I guess) whatever payroll solution you use will file them all.”

Since then, similar questions have continued to roll in. To try and bring calm to the situation, this “RTI troublespots” article examines the practicalities for directors under RTI and addresses some of the points raised so far.

The main problem for advisers is that the director may actually draw the cash and they are left to decide later how much of this is salary and how much is going to be dividend. If the director has an overall debit balance on his loan account, the amounts he draws and subsequently decides are salary payments breach the on or before rule (assuming that the total amount is in excess of LEL). This presents the risk of substantial penalties (of up to £1,200) in 2014/15 when the late filing penalties commence.

It would be sensible to decide on how much to pay the director, and when, and then prepare a payroll and RTI to reflect this; it could be monthly, quarterly or annual, but the important thing is to make payments of the amounts at the time stated on the RTI submission (at “date of payment”).

Remember that you can file a FPS at any time before payment is made, which leaves the option of running a salary for 11 months of the year in month 1, and making the payments on (say) 20th of each month. Alternatively advisers might run quarterly payroll in advance every quarter.

Of course it is possible to still pay the salary in one lump as an annual amount, but if running a payroll in March 2014 to record an annual salary of, say £7,500, a payment would need to be made to match. Making a credit to the director’s loan account would not count as payment for RTI purposes, as payment has already been made in advance. There is also an issue in potentially triggering NIC liability if the pay is drawn before the salary run, although this frequently won’t be a problem if the director draws less than the threshold.

Where the salary is “paid” by crediting to the director’s loan account which is in credit rather than overall debit, these problems largely disappear, although if a very small company does not actually write up books and ledgers this may be difficult to demonstrate.

Any other cash drawn against loan account would (assuming that the above has been done) then not be salary and could be regarded as a loan, which might subsequently by either repaid or cleared by a dividend. A file note could record this fact.

HMRC’s view is that number of hours for many directors will be 30+ on the FPS. In particular it has been confirmed to me that the hours data on the RTI will NOT be used for minimum wage purposes. Obviously if you KNOW that a director does very few hours you should report accordingly.

Where a director is to be paid in a single month and not in others, the employer may wish to file an inactivity report (and/or nil payment returns) so that HMRC is aware that no payments are due each month.

More RTI resources

Rebecca Benneyworth is lecturing throughout February and March on ‘RTI and other PAYE issues’ as part of the Tolley CPD Seminars programme. Further articles will follow based on troublespots raised at her talks and on AccountingWEB’s Any Answers page.

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Replies (125)

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By Mark Kershaw
08th Mar 2013 16:38

Limited Company PAYE

Just had a conversation with HMRC about a group company which no longer has any employees, and will remain dormant for the foreseeable future, therefore the PAYE scheme is no longer required. I wanted to close down the scheme but I was told by HMRC that we cannot do that!

Their argument is that, as it is a limited company and has directors, and directors are technically employees, they will not allow us to close it until such time as the company ceases to exist at Companies House.

Apparently we also now have to go on to HMRC website every month and register a Nil Return for this company, indefinitely until such time as the Directors decide to close down the company (if ever).

What a waste of time and effort!

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Replying to Portia Nina Levin:
By silicondale
11th Mar 2013 15:24

Not so

Mark Kershaw wrote:

Just had a conversation with HMRC about a group company which no longer has any employees, and will remain dormant for the foreseeable future, therefore the PAYE scheme is no longer required. I wanted to close down the scheme but I was told by HMRC that we cannot do that!

Their argument is that, as it is a limited company and has directors, and directors are technically employees, they will not allow us to close it until such time as the company ceases to exist at Companies House.

Apparently we also now have to go on to HMRC website every month and register a Nil Return for this company, indefinitely until such time as the Directors decide to close down the company (if ever).

What a waste of time and effort!

Mark - There is a company which I have been a director of since 1997. The company itself was formed in 1991. None of its directors have ever received any fees or salary, and the company has no employees. It also has never registered for PAYE and does not need a PAYE scheme. (the company is not dormant, but all of its operations have been done through outsourcing).

So HMRC have been telling you porkies. A limited company is NOT required to have a PAYE scheme. I guess the answer is not to submit any RTI returns for three successive months, and HMRC themselves will choose to close the scheme.

 

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Chris M
By mr. mischief
09th Mar 2013 11:49

my response

My response to the sort of drivel HMRC spout like in the last post is simple.

1.  This is what I want you to do.

2.  If you want to be jobsworthy about it, show me the piece of legislation - as opposed to HMRC drivel - which is sopping me from doing it.

I always write to a named individual and make it clear I hold him or her personally accountable for any waste of public money arising, also that I am happy to go all the way up the appeals process if needed.

This works!  They usually cave in.  It's not a bluff, when they don't I go up the management chain until someone caves in.

Their attitude stinks.

 

 

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Chris M
By mr. mischief
10th Mar 2013 12:57

The dummy has been spat out of the pram

The last post is my nomination for the "Alex Ferguson Trophy" for services to parting dummies from prams.

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Replying to adam.arca:
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By Hazel Edwards
10th Mar 2013 13:42

Unworthy

The previous post to yours doesn't deserve a comment so I won't but thank you for yours :-)

 As your comment came through I was already posting regarding the HMRC 'Get ready to operate PAYE in real time' video which I have just watched. This may be of interest to Kazmc and Herring.

The HMRC video was sent via e-mail link on 8th March and if you can get to watch it, you may find the section on the EPS interesting and I quote:

"HMRC know from the regular FPS how much the PAYE/NI contributions liability is. The EPS is only submitted when you need to let them know of any alterations to this liability, for example, recovering statutory payments or letting HMRC know that a nil payment is due."

I read this to mean that if there is no PAYE/NI payment due in the tax period, then submit an EPS. Which was my original understanding, which is contradictory to what Rebecca has said to this thread throughout. Our Sage software actually asks us to do this as part of the EPS screen, that is why I kept asking the question in this forum and called Sage and the RTI helpline on several occasions.

If anyway has the time or the inclination to listen to this video, then I would welcome their interpretation on this. If I am wrong, then that is ok as it means that ultimately, my clients are being well looked after and I haven't lost my nerve to question things I don't fully understand.  

There is a live Q&A session on Thursday 14th March from 14:30 to 15:30 where HMRC staff will be available to take questions.

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By daveforbes
10th Mar 2013 14:26

As you said

"EPS is only submitted when you need to let them know of any alterations to this liability"

So if you have sent in an FPS saying there is £50 liability but it turns out based on information not on the FPS (e.g. CIS) the liability is zero then send in an EPS otherwise HMRC will be expecting a payment.

If you have sent in an FPS saying zero liability and there is nothing further to change this, then sending an EPS saying "zero liability" would not be notifying an alteration and is not needed.

 

 

 

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By patricia caputo
10th Mar 2013 20:17

Concerns

 

When I joined this discussion it was due to my reservation on daily paid staff, on which I was promptly assisted.  Due to this I have been receiving notification of all new posts and have read them all.

I do have concerns.  I remember only too well when all the study and qualifications earned did not enable me to complete a complex SA return for a new partner.  I had calculated the tax due etc but simply did not know how to put it on the return.

I took it round to a friend, an Inland Revenue inspector (this was back in the paper return days!), and she couldn't do it either.  I rang another friend who was, at the time, the President of the CIOT. He laughed and said that he didn't know but knew someone who did.  Fortunately this final person was able to help me.

I was reminded of this because a lot of these posts are from agents who have gone on courses, read all the material out there but - just like me on that occasion - are none too sure how it will go in practice.  And, to be fair, every time the professional bodies have gone back to HMRC and said that anything is unworkable HMRC have adapted the process (leading to all the changes - I have now attended four RTI events!).

I suspect that HMRC are in almost as vulnerable position as we are since the problem areas of RTI seem to be driven by the DWP.

It is entirely possible that no matter how ready for RTI we think that we are none of us actually know how it will all go once it goes live. I recall the words spoken to me by an eminent Employment Taxes specialist; he told me that (I cannot remember the exact figures) something like out of 80% of employers 23% do not use computers.  So he asked HMRC what they were going to do to assist these employers. The answer?  "We are putting some really easy to use software on our website for them".

I think that that says it all.

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Teignmouth
By Paul Scholes
11th Mar 2013 09:09

Life without certainty

Good point Patricia, whilst this subject is so "up in the air" we just have to jump in, follow the software, and take the consequences, ie loads of grief or storm in a tea cup.

I listened to a discussion on the radio from a representative of disadvantaged groups and the problems, aired above, are insignificant compared to the number of organisations and people without IT or without a decent internet connection.

My guess is that the system will need significant amendment as the months go on and, for example, monthly reporting for all, has to me a sensible consideration.

Life in the real world, for the majority, is uncertain, just remind your clients of this and get on with it.

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By Blue
11th Mar 2013 15:28

Can you treat director's salary as capital introduced?

For a payroll where there are only directors, each being paid a monthly £624, does the £624 have to be physically paid each month? What is stopping them debiting the £624 each month to the wages p&l account, and crediting the £624 to the director's loan account, effectively treating it as capital introduced?

 

The FPS submissions could still be made each month, but it would allow the director to draw his salary from the company when he wants (or not at all)?

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Replying to Ruddles:
Tom McClelland
By TomMcClelland
16th Mar 2013 09:58

Single director payment to DLA

Blue wrote:

For a payroll where there are only directors, each being paid a monthly £624, does the £624 have to be physically paid each month? What is stopping them debiting the £624 each month to the wages p&l account, and crediting the £624 to the director's loan account, effectively treating it as capital introduced?

 

The FPS submissions could still be made each month, but it would allow the director to draw his salary from the company when he wants (or not at all)?

I wondered about doing the annual scheme concession, paying the director £7000 odd on April 6th credited to DLA, then the director can draw down their DLA at their convenience. As long as the RTI submission includes a net deduction of the same figure to indicate that no actual cash was drawn I don't see why this would be a problem.

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Replying to Portia Nina Levin:
Rebecca Benneyworth profile image
By Rebecca Benneyworth
16th Mar 2013 10:07

@Tom
If the loan account is clear or in credit at the start of the tax year then the operative date for PAYE (and therefore RTI) is the date of the loan account credit. So you simply report the payment as credited as a payment on that date and draw it down whenever.

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Replying to the_Poacher:
Tom McClelland
By TomMcClelland
16th Mar 2013 10:15

Ummm...

RebeccaBenneyworth wrote:
If the loan account is clear or in credit at the start of the tax year then the operative date for PAYE (and therefore RTI) is the date of the loan account credit. So you simply report the payment as credited as a payment on that date and draw it down whenever.

I think that is what I was suggesting. Either that or I've misunderstood your response.

The reason for my mentioning the equivalent net deduction (indicating zero cash changing hands immediately for the payment) is to avoid any possibility of hashtag compliance failure. But I suppose you can also avoid that by not entering director's bank details into the payroll software so no hashtag could be generated anyway.

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By Trish Long
13th Mar 2013 10:29

CIS

Nobody has approached this subject, how are CIS payments to be filed, is this under the RTI flag as well?

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Rebecca Benneyworth profile image
By Rebecca Benneyworth
13th Mar 2013 11:50

CIS

The process for CIS filing is completely unaffected by RTI. You will still file CIS 300's as normal. The only time that CIS appears under RTI is when a limited company sets off CIS suffered against PAYE due in the month. Otherwise, carry on as normal. File RTI's for employment and CIS for subbies.

Just picking up on some worried people re director only schemes. You can make the scheme an annual scheme, under which you would only need to file one payment a year and would not need to file EPS NIL or inactivity reports. You do this by ringing HMRC on 0845 366 7816 and have your client's accounts office reference handy. They will ask you which month you'll be making payment in and you'll file just one FPS for that month. There is more detail about annual schemes at http://bit.ly/YRLHwc

 

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Jennifer Adams
By Jennifer Adams
13th Mar 2013 14:07

Thanks Rebecca... relief at last!

See my comment three pages back - comment no 2 - in the webinar mentioned HMRC's presenters just said 'nothing has changed' without going into further detail. Wished they had then I wouldnt have got so worried. I was going to submit NIL returns every three months but wont now. I'll phone HMRC today (hope they know what I'm talking about!)

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By David Gordon FCCA
18th Mar 2013 09:59

The blind leading the blind.

-

See the report in today's "Times" page11 bottom of columns' 1 & 2.

 I spoke to a most helpful HMRC employee re our problems with RTI.

 He was not able to help.

 I asked him, as part of the learning process, had HMRC had its staff work through a couple of representative payrolls, as if payroll clerks.

 I doubt it will surprise anyone to learn that HMRC did not think this was a necesary part of the training process.

 So, there you are, of the PBI (Poor Bloody Infantry) on the RTI front line supposedly able to deal with our enquiries, most of them actually do not know how to prepare a simple payroll.

 That is if you are able to make contact in the first place, See line 1 above.

 

 

 

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By DMGbus
18th Mar 2013 13:23

Latest dodgy advise to an employer...

A client tells me that they telephoned HMRC regarding the need for an EPS, where no wages were paid in a given tax month.

"carry on sending nil paylsips to us by post like you already do" was the advice, when the client said shouldn't they instead be filing a monthly EPS, the HMRC employee said "what's an EPS?".

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Replying to stepurhan:
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By Kazmc
18th Mar 2013 13:33

Seriously?!!

DMGbus wrote:

A client tells me that they telephoned HMRC regarding the need for an EPS, where no wages were paid in a given tax month.

"carry on sending nil paylsips to us by post like you already do" was the advice, when the client said shouldn't they instead be filing a monthly EPS, the HMRC employee said "what's an EPS?".

 

Oh dear!! Next tax year is going to be fun..... NOT!!

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Replying to RedFive:
Tom McClelland
By TomMcClelland
21st Mar 2013 09:52

Wrong information from helpline

Kazmc wrote:

DMGbus wrote:

A client tells me that they telephoned HMRC regarding the need for an EPS, where no wages were paid in a given tax month.

"carry on sending nil paylsips to us by post like you already do" was the advice, when the client said shouldn't they instead be filing a monthly EPS, the HMRC employee said "what's an EPS?".

 

Oh dear!! Next tax year is going to be fun..... NOT!!

We also have cases of HMRC helpline telling employers that they must file P35/P14 for 12/13 before they can do any RTI filing for 13/14, which is completely false. (It may be true in some software, I don't know, but if so it is a software restriction, not a filing restriction at HMRC's end)

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By David Gordon FCCA
18th Mar 2013 14:08

something different- first charges

Mum lent Son £8,000 to start his company. Son agreed to give Mum (No connection to the company or business) a first charge over the equipment and assets to secure her loan.

A company meeting was held, duly minuted, including recording a Resolution attesting to the loan, quoting the value,  and the fact of a charge given in exchange. 

We then filed the Resolution with a form MG01, all carefully completed and signed.

Co Hse have rejected the documents on the grounds that they are not evidence of a charge.

Except and unless we engage a solicitor to prepare a formal document at costly fees , has anyone an alternative suggestion?

 

 

 

 

 

 

 

 

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Replying to Tim Vane:
By silicondale
18th Mar 2013 16:26

How is this relevant?

David Gordon FCCA wrote:

Mum lent Son £8,000 to start his company. Son agreed to give Mum (No connection to the company or business) a first charge over the equipment and assets to secure her loan.

A company meeting was held, duly minuted, including recording a Resolution attesting to the loan, quoting the value,  and the fact of a charge given in exchange. 

We then filed the Resolution with a form MG01, all carefully completed and signed.

Co Hse have rejected the documents on the grounds that they are not evidence of a charge.

Except and unless we engage a solicitor to prepare a formal document at costly fees , has anyone an alternative suggestion?

Not clear to me what this has to do with the subject of this thread.

However, in the event of any future problems, the attempt to file at Companies House has been made and is documented. I cannot imagine that a court would just ignore the documented facts including the MG01 form itself. I see no point in jumping through additional and expensive hoops just to satisfy a filing clerk in Co Hse.

But what bearing does this have on directors fees and RTI ?  Maybe I'm just slow being a CEng and not an elevated FCCA but I fail to see a link.

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By CJMaslen
22nd Mar 2013 17:24

RTI Education Event

I turned up for an HMRC presentation on RTI,  together with a number of others, due to take place in Bradford today, only to be told on arrival that it had been cancelled.

No doubt the cancellation was due to the (modest) snowfall, but I was left reflecting that, if this was the case, what a nation of wimps we have become.

Thank goodness we have Rebecca to turn to with our problems.

.

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By Carolynne
28th Mar 2013 10:34

IMPORTANT NOTE ON Directors on Low paid salaries

I recently undertook a course on RTI, and one of the points brought up with directors.  Is that if they are on a payroll and only receive their income in month 12.  We need to be aware that if their directors loan accouont is overdrawn and they say pay £200 for a personal item.  This is deemed that they have taken £200 of their salary, and and RTI report needs to go up as such.  It does not affect directors who DL accounts are not overdrawn though.  Has anyone else heard of this?

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Replying to coops456:
By cfield
28th Mar 2013 11:03

Overdrawn DLA

Yes Carolynne, there is a lot on this very thread about overdrawn loan accounts. I believe the solution is to put the loan on a proper legal footing (see my posts on 3/3 and 11/3) so have a Loan Agreement in place, pass the necessary Resolution under the Companies Act and change the Articles if necessary.

For the personal items issue, include a clause stating that any such items are automatically added to the loan unless otherwise agreed. Don't see how HMRC could challenge that if it is all done correctly and dated contemparaneously.

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By chEEK
29th Mar 2013 17:31

Just a real-world note

(1) Paying Month 12 (or Quarter 4) as bonus would mean that the DLA is not overdrawn?

This is particularly important for small companies where the directors do not know if the company will earn enough for them to draw a salary in that year, so filing a salary via RTI on the 6th April would not be useful/viable.

(2) On that note, there was discussion early on in this thread regarding loan accounts with amounts credited but not drawn, which didn't seem to evolve into a full discussion. So I'd just like to note that any "solution" should allow for the real-world reasons as to why things are done the way they are...

There are many SMEs that are fighting to keep one nostril above water, often having directors who do not draw down their entitlements because to do so would hobble or even bankrupt their company at that time. They may pay the tax/NI on any PAYE amounts they intend to drawdown (to use their tax allowances for that year) but leave their own entitlements in their DLA. To report these amounts via RTI, with the expectation that the amounts due to the director(s) need to be withdrawn, would run counter to the real-world business driver of keeping their company afloat while they struggle to help it succeed.

So if anyone is talking to HMRC on these matters, please keep this in mind - any procedures that are devised must bear in mind the real world and the exigencies of running  a business.

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