Deadline Approaches for Comments on PAYE ReviewTuesday, September 21st, 2010
The deadline for submitting responses to HMRC’s discussion document on improving the operation of PAYE is 23 September so any concerned readers wishing to make comments on HMRC’s Discussion document on improving the operation of Pay As You Earn (PAYE) have only until then to do so. On that date, the eight-week period for feedback comes to an end.
As a reminder, the Coalition’s June 2010 Budget announced that the Government wished to explore how the PAYE system could be improved in order to reduce costs, ensure accurate tax calculations, and make it easier for employers and HMRC to administer. The document published on 27 July was a “discussion” document, not a “consultation” document; HMRC will publish proposals for consultation at a later date, following consideration of the current, less formal discussions.
The discussion document explored two specific reforms:
- a process called “Real-time Information”, which considered options for moving to a system that collects information on PAYE deductions at the time employees are paid instead of at the tax year end.
- a process called “Centralised Deductions”, which is a longer-term enhancement that could see HMRC actually handling the tax and NICs calculations centrally.
During the two months, HMRC has conducted a number of well-attended public meetings, with payroll system developers, employers and agents, all of whom will be affected in various ways by the proposals. The Learn Centre sponsored one such meeting with Kate Upcraft in London where over 40 employers and software houses gave their views to HMRC. We shall be reporting on this next week.
With regard to the “Real-time Information” proposal, the general view is that the use of the existing BACS payment systems to send additional information each payday to HMRC in place of annual returns is a sensible way forward. Many problems and issues have been raised but they do not appear to be insurmountable. For example, employers who pay by cash or cheque would not be able to send pay and tax data by BACS but would be provided with an alternative online facility. There is also a common view that, for “Real-time Information” to meet its objectives, the payrolling of benefits has to be included. There are obviously significant development issues, both of payroll systems and HMRC’s systems. Although a date of 2012 is mentioned in the discussion document, this does not mean that HMRC is determined to proceed with the proposals by then. The first issue for HMRC, based on the feedback, is whether there is a sound business case to move to the consultation phase.
There appears, however, to be considerably less enthusiasm for “Centralised Deductions”. Under this proposal, which goes much further than “Real-time Information”, employers would process their employees’ earnings up to gross pay and send that information to HMRC. The data for each employee would be in the format of:
- £a subject to both tax and NICs
- £b subject to just tax
- £c subject to just NICs
- £d tax and NICs free
- £e of SSP
- £f of £SMP
- £g net pay deductions, etc
On receipt of these values, HMRC would carry out the “gross to net” calculations, and then pass the resulting net payment to BACS for payment to the employee. The “Centralised Deductions” proposal removes PAYE entirely from the hands of employers and places the full responsibility onto HMRC.
There have been some positive comments on the idea, for example, reducing the involvement of employers with pay calculation issues, and greater flexibility for government to change tax rates at any time. On the other hand, the following objections have been raised:
- Over a period of 60 years, PAYE and the calculation of both gross and net pay have become an integral part of the employer/employee relationship. That relationship could be damaged if employers are unable to assist their employees with gross to net pay issues.
- Employer-managed PAYE is the ultimate in tax collection outsourcing. Can there possibly be a business case for HMRC taking it in-house?
- PAYE expertise is one of the key contributions made by payroll professionals to their businesses. Removing it potentially destroys the nature of the payroll profession and reduces the size of payroll departments. In emotive terms, “Centralised Deductions” is an attack on the payroll profession.
- If an employer makes an error in calculating net pay, only that employer’s employees are affected. If HMRC makes a mistake, millions of employees will be affected. Is the possibility that that could happen even once a risk that any government can take?
- The stated objective of “Centralised Deductions” is to calculate tax and NICs liabilities due on a person’s earnings from all employments. That objective cannot be achieved if a person also has taxable earnings from other sources, with the result that underpayments of tax will still occur.
- Over many years, payroll systems have been developed in many diverse ways, beyond the requirements of the Payroll Standard, to integrate employers’ contractual provisions and internal procedures. Many of such developments are specific to individual employers and industries, involving the automatic calculation of contractual payments, such as overtime, bonuses, commissions, shift payments, sick pay, holiday pay, occupational maternity etc. payments. As HMRC will not handle any of these calculations under “Centralised Deductions”, all of these processes would require re-development in order for the gross amounts to be calculated before being passed to HMRC.
- A number of PAYE-related and other statutory calculations will require considerable work by developers and even changes to legislation, e.g. court order calculations, NICS aggregation, retrospective recalculation of NICs, notional payments, grossed-up payments, tribunal awards.
Another issue, although not one that would prevent the introduction of “Centralised Deductions”, is the existing statutory right for an employee “to be given by his employer, at or before the time at which any payment of wages or salary is made to him, a written itemised pay statement.” The itemised pay statement must include the employee’s gross pay, the itemised amounts of any variable or fixed deductions, and the net pay (and any net pay splits). As this right could not be met under “Centralised Deductions”, a change in employment law would be required. (Employment Rights Act 1996, s.8)
The response deadline of 23 September has been set so that the many comments submitted can be considered and fed into the Government’s Spending Review.