July 26, 2012
Since April 2012, over 100 companies of varying sizes have been working with HMRC to pilot a new scheme, Real Time Information (RTI) Payroll, which is designed to reduce the administration involved with PAYE routine tax compliance and ensure tax bills are more accurately calculated.
The initiative will require employers to report PAYE payments to HMRC in real time each time they run the payroll system, instead of waiting until the end of the tax year. From HMRC’s perspective this should help them improve efficiency and they expect the change to save £300m on processing PAYE returns at the end of each year. It will also help reduce the administration involved with the introduction of the forthcoming Universal Credits system. For the taxpayer, it means more accurately calculated, and timely tax bills.
We are starting to get questions from clients about the change and thought it would be useful to compile a Q&A explaining everything you might need to know to prepare for the change.
How will RTI work?
As an employer you will tell HMRC about any tax, national insurance contributions (NICs) and other deductions made either immediately when, or just before, payments are made to employees, instead of waiting until after the end of the tax year. This is referred to by HMRC as a ‘Full Payment Submission’ (FPS), which details all tax, NICs and other deductions made either when or before the payroll is run.
When submitting your first FPS, as an employer you should include everyone employed during the current tax year, including starters and leavers, and those who have not yet received a payment in the relevant period, and state their hours worked per week. Thereafter the FPS only needs to contain pay and deduction details for employees paid in that related payroll, it doesn’t need to include unpaid workers.
Some firms will need to submit an EAS (Employer Alignment Submission) instead of FPS. This will be the case if you are a larger employer with over 250 employees or if you have a split PAYE scheme with different payroll providers, two or more payroll systems for example monthly and weekly, or if you are unable to make a single FPS submission. It essentially amounts to the same level of information to be supplied with the payroll run; if this situation might apply to your business we can advise you on compliance.
When will RTI start?
RTI is expected to come into force in April 2013 and HMRC has reassured taxpayers and business owners alike that they will have all the requisite IT systems in place by then to fully meet demand for the service. For smaller companies with less than 8 employees, HMRC is developing free PAYE software to be made available to businesses to file electronically. Larger companies will be able to continue using their existing payroll software with a few amended processes. You can find out more about software requirements from HMRC’s information resources at http://www.hmrc.gov.uk/softwaredevelopers/rti/index.htm.
What should I be doing now?
Currently there is nothing for business owners to do in order to be prepared, other than be aware of RTI and understand the changes to follow next year. You should also ensure you have the relevant information held already for existing employees and a process for extracting and updating information from employees as required by RTI, e.g. reporting a change in name or tax code.
HMRC have confirmed that RTI will be introduced in April next year and penalties for non compliance will start from October 2013 when Universal Credits begin.
What is the benefit for me as an employer?
RTI will make the PAYE process simpler and less of an administrative burden. It will reduce some of the paperwork, for instance you no longer need P35, P14 or P38a documents and employee starting and leaving processes will be less complicated.
Instead you will inform HMRC of deductions electronically every time you run the payroll, with the software used automatically gathering the relevant information and transmitting it to HMRC via the Government Gateway or EDI. There will be no change to existing BACS arrangements.
HMRC will be aware in ‘real time’ how much PAYE the business owes, rather than at the end of the tax year.
What about new employees?
Under the new scheme you will no longer need to obtain a form P46 but you will need to gather similar information from employees and include it within the payroll system to be sent on to HMRC at a future date.
What benefit is there for my staff in using RTI?
After such a long time of mistakes made by HMRC this should make PAYE more accurate for individual taxpayers. It will mean fewer incorrect bills and offset errors and will allow HMRC to pursue late payments more effectively. It should also reduce the potential for tax fraud, which ultimately benefits everyone.
What happens at the end of the tax year?
As an employer you will just state on the final payroll submission around the 5th April that this is the final one for the tax year. You will also still need to issue employees with a P60 and complete any P11D paperwork required.