How to avoid RTI reconciliation issues
After the main migration to RTI this April the last six months or so have flushed out several issues which have been causing problems for employers, explains CIPP senior policy liaison officer Diana Bruce.
A few weeks ago we reached the point where virtually all employers are filing PAYE in real time, which coincided with HMRC’s publication of a report highlighting the main causes of reconciliation problems. To follow are some of the causes of these issues and how employers can avoid them in the future, along with a few hints and tips of what has been learnt along the way.
On 12 August HMRC announced that it had received feedback that some PAYE schemes had had difficulties reconciling the difference between the tax HMRC said was due, and the tax the employer thought was due. As a result HMRC set up a dedicated team to identify the cause of these discrepancies. They then published a report about the findings from an analysis of the disputed PAYE charges, undertaken between July and September this year.
EPS (Employer Payment Summary)
Several problems with the EPS led to reconciliation issues such as:
- Non-completion of an EPS where one would be appropriate
- Use of ‘this period’ figures instead of ‘year to date’ figures
- Timing of EPS returns resulting in the credit against the charge applied to a different tax month than the employer was expecting it to
To give an example:
- An FPS is submitted on 31 May for employees paid on 31 May (month two)
- The EPS relating to this FPS must be submitted to HMRC for month two on or before 19 June 2013
- HMRC systems look at the ‘charge’ on 6 June 2013 based on the FPS and/ or EPS data submitted by this date for month two
If there is no EPS then the dashboard (L&P) viewer will be updated after 6 June with the known figures. HMRC then carries out another calculation for month two on 19 June. The dashboard is then updated after 20 June. If the EPS for month two is not received by 19 June then any submission after that is a credit against month three. If the EPS for month two is submitted before 19 May it is a credit against month one.
Based on that example if an employer chooses to submit the FPS and EPS on 31 May then the system will still assume month tow as it is after 20 May so there shouldn’t be an issue. The key message is to ensure the EPS for the tax month in which it relates is submitted before the 19th of the following month. HMRC has said that when they have looked into EPS submissions, a number of them have been after the 19th of the month meaning the viewer is not correct according to the employer view.
Payments on and after leaving
HMRC systems are calculating the charge correctly where there is a payment after leaving. However, how an employer or their software treats the final payment on leaving and after leaving can cause incorrect charges. Examples are:
- One software product continued to submit FPSs after the employee had left, causing duplicate employments and therefore an overstated charge. HMRC has been working with the software provider concerned
- Some employers ticked the box to denote a payment after leaving where the payment is the normal final salary payment, and reported the payment on the FPS that first reports a date of leaving. ‘Payment after leaving’ had been interpreted as a payment made after the employment had ended, even though a leaving date hadn’t already been reported. HMRC’s guidance on payments after leaving has been updated
Misalignment between tax months and calendar months
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Reporting PAYE in real time has highlighted that some employers are not operating PAYE according to the regulations. The payroll run date is being used rather than the date on which the employees are paid which means that deductions are not being aligned to the right tax period. So when reporting PAYE in real time, the FPS must report the correct payment date - the date on which employees were paid, not the date that the payroll was run, unless of course they are one and the same. Some examples from HMRC’s analysis include:
- FPS contained weekly figures up to week 13 and monthly payroll up to month three, but payment only up to week 12
- Employer’s FPS sometimes contained five weeks’ information but payments always for four weeks
- Weekly paid employees - the totals on month one to four made for four weeks in month one but FPS included pay and deductions for week five
If someone works on calendar months rather than tax months then they may need to realign the dates. HMRC has more information on this on their website: Correcting payroll reports not aligned with payment dates and tax periods.
Just over 10% of cases in the analysis related to duplicate employments. When an FPS is submitted with different details to those held by HMRC, for example an employee’s date of birth, NI number, start date or works/employee number, this can lead HMRC to think that there are two different people. This is the cause of duplicate employments being created so it is very important that the accuracy of information submitted is carefully checked.
Adding a new starter
Setting up new starters is another issue which has created problems with reconciliations. The crucial element here is that when setting up a new employee, previous pay or tax details are not to be used on the FPS, only the amounts from the current employment should be used. It is also important to note that whether using commercial payroll software or Basic PAYE Tools, another start date should never be included on any FPS. If an incorrect start date has been used, or one wasn’t included at all, then the employer should just update their own payroll records to reflect the correct start date. Do not report the corrected or known start date on the next FPS to HMRC as this will result in a duplication of the employee's record on their systems. It is well worth checking with your software provider as to what and how their software will work with amended dates.
Charges - troubleshooting tips
If you cannot see how HMRC have calculated the charge, then before you contact HMRC:
- check that you have sent an EPS (if needed)
- ensure that any EPS includes the year-to-date figure
- ensure that you have left enough time for the dashboard to be updated
- check your payments to HMRC match the amounts reported in your FPS and EPS submissions, with particular reference to tax weeks and tax months
- check you have correctly reported leavers and payments after leaving/retiring
- check that HMRC have not allocated the payment to a different period. If this has happened, you will need to contact HMRC directly
Annual Amount of Occupational Pension field
HMRC has seen a small number of cases where no occupational pension is being paid yet employers have entered 0.00 in the Annual Amount of Occupational Pension field on their FPS. Entering 0.00 in this field suggests that an occupational pension is in payment, but the payment is nil. This could have a knock-on effect for employees with student loan deductions, as it prompts an automated notification to the Student Loan Company from HMRC advising that an occupational pension being paid. This may result in the cessation of any further student loan deductions. If you are not paying an occupational pension, you should leave this field blank and not enter 0.00.
There have been quite a few employers who have been using category D instead of reporting the normal hours worked. As this can affect universal credits HMRC have issued a plea to please report the normal hours worked. Only use D if genuinely, this cannot be included.
Beginning on 15 October, HMRC started issuing a series of notifications to employers. HMRC is calling these Generic Notifications and there are four types:
1. A non-filing notice - This will be sent to employers when HMRC’s records show that an employer appears not to have sent one or more of the FPSs that HMRC expected for a particular period. It will explain that the employer is running the risk of incurring penalties – and what to do to avoid them
2. A late filing notice - In a similar vein, this will be sent to an employer who appears to have submitted an FPS late. It will remind employers that FPSs should be sent on time – and that penalties may be charged in future if they are not
3. A late payment notice - This notification will be sent where an employer appears not to have made full payment on time. It will explain that in order to avoid potential penalties in future, employers should bring payments up-to-date and ensure future payments are made on time and in full. It will also explain what to do if no payments were actually due
4. A notice reminding about late payments - Where an employer does not pay in full and on time again, this will be issued as a follow-up to the above notification. It will reiterate the action required to avoid penalties for failure to pay
The aim of these messages is to help employers comply with their PAYE obligations and in particular get their businesses to submit and pay their PAYE to HMRC on time. This will help them get ready for 6 April 2014 when in-year penalties for late reporting and late payment will replace the current end-of-year PAYE penalties. HMRC said that it wants to receive payments and returns on time; it does not want to charge penalties.
The messages warn that the employer may incur penalties in future, even if they have done nothing wrong for 2013-14 (for example if they are a smaller employer taking advantage of the current relaxation for ‘on or before’ reporting). If this is the case the employer does not need to contact HMRC - but they should be preparing for 2014-15. HMRC will update the wording of these messages in April 2014.
Viewing generic notifications
How you view the messages depends on how you make real time submissions to HMRC.
If you make all your real time submissions via Electronic Data Interchange (EDI), then your messages will be presented to you within your EDI software. If you make your real time submissions by internet, and you use commercial software, you may receive messages within your software. If your commercial software is not compatible, or if you use HMRC’s Basic PAYE Tools to submit by internet, you can view your messages by logging into PAYE Online Services. You then select the generic notifications from within the notice summary section, in exactly the same way as you might do already for tax code notices.
If you use a mixture of EDI and internet – for example, you use EDI for your FPS submissions, but use HMRC’s Basic PAYE Tools for your EPS or Earlier Year Update submissions – then you can view your messages by logging into PAYE Online Services as above.
You can opt to receive emails alerting you to new messages – simply choose the ‘Notifications email’ option within PAYE Online Services. If you currently receive email alerts for existing notifications such as tax codes, then you will also automatically receive email alerts for generic notifications.
Cancellation of inactive PAYE schemes
And on a last note, from 28 October HMRC will also start sending letters (and these will be letters not the electronic messages of the Generic Notifications) telling an employer that HMRC are cancelling their PAYE scheme if it was opened after 5 April but has been inactive for 120 days.
The aim is to reduce the administrative burden on both HMRC and employers. This process will cancel PAYE schemes which are set up when a new business is registered after 5 April 2013, but are then never used. The process will not cancel any schemes registered as annual schemes.
HMRC understands that some external business processes are to create a PAYE scheme as normal practice when a business is set up. So to help HMRC identify unnecessary schemes at an earlier date additional questions will be asked when a scheme is registered.
Diana Bruce is the senior policy liaison officer for the Chartered Institute of Payroll Professionals (CIPP).