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RTI – The Beginning
Friday, October 28th, 2011
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George Osborne made a comment during the run up to the 2010 election which implied that the Conservatives would review the operation of PAYE. This was not in the manifesto. However, page 46 (of 121) in the June 2010 Budget Report announced there would be a consultation ‘on mechanisms that could support more frequent or real time PAYE data’. We only had to wait until July 2010 when the Coalition Government published their document ‘Improving the Operation of PAYE’ (see Further Information below). At this time, the phrase ‘real time PAYE data’ had changed to ‘Real Time Information collection’. Although not mentioned as such in the document, this was the birth of the latest acronym to add to our world – RTI.
The consultation document looked at the current PAYE system and the reasons why there was a need for improvement. For ease, and for fear of duplicating the entire consultation document, this can be summarised:
- The fundamental processes behind PAYE have remained unchanged for 66 years, since its introduction in 1944
- In 2009/10, it generated £249 billion tax and NICs, costing less than 1p for every £1 collected
- PAYE works well, particularly where a taxpayer’s employment remains stable
- However, 2010 is a different world from 1944, and PAYE does not work well for some employees for various reasons:
- Changing payroll operations – many staff were paid weekly in cash , now they are paid monthly by BACS, frequently using a computerised system
- Changing working patterns – ‘jobs for life’ are no longer the norm and the labour market is a transient one, with full, part and flexi-time employees that did not exist in 1944. Further, there are an increasing number of people over State Pension age who continue to work, as well as people holding multiple jobs requiring multiple tax codes
The document outlined modernisation of the computer system at HMRC, which has culminated in the National Insurance and PAYE Computer System (NPS). The NPS holds a single tax account for each employee and pensioner containing tax, NICs and employment information. Previously, information had been held at employer level rather than employee level on up to 12 separate databases. The efficiency of the NPS could be further enhanced by Real Time Information exchange. In turn, the provision of this information not only improves the operation of PAYE but will also allow benefits and welfare information to be impacted as well – therefore, the NPS will contain a master record at employee level of earnings, tax, National Insurance, benefits and welfare payments. This concept of a master record at HMRC is very important, as we will see as we explore RTI in coming weeks.
Returning to the July 2010 consultation document, two ‘next stage’ concepts were proposed – Real Time Information and Centralised Deductions. These are summarised below:
Concept 1 – Real Time Information
- Most current PAYE operations would continue as normal, with the calculation of pay, tax, NICs and Student Loans remaining with the employer
- At the point the payment is made through the payroll via BACS, an additional file would be created and sent to HMRC, also via BACS
- Where the payment is not made by BACS, i.e. cash / cheque, the same information would be provided to HMRC, though not via the BACS route
- On receipt of this additional file, HMRC will know, in real time, where an employee is working, how much they are earning and paying in tax and NICs. For new starters and leavers, the P45 / P46 process for the employer is greatly simplified and real time data exchange will enable HMRC to get the tax code correct for more people, more of the time
- HMRC will also know, in real time, the monies that the employer should be remitting monthly or quarterly – at present, the only reconciliation between what is paid and what is due is made at year-end
- Year-end reporting would be another simplification – the information would be submitted on a per pay period basis so the administration at year-end is reduced
- As NPS will hold benefit, welfare and Tax Credit information, this can be updated in real time, meaning that the chances of error, fraud or overpayment is reduced
- And finally, given the real time flow of earnings data into a system that the Department of Work and Pensions can see, this will enable future benefit reforms
Concept 2 – Centralised Deductions
- This was discussed in the consultation document as an option that could come as a result of the introduction of Real Time Information working with the NPS – i.e. once data is exchanged in real time, Centralised Deductions could be considered afterwards
- Simply, HMRC described this as ‘centralising the calculation and deduction of tax, NIC and Student Loan repayments… and placing it fully with HMRC’
- From the point of processing:
- The payroll department would electronically send HMRC the gross payment to be made each pay period
- BUT, the calculation for ‘statutory payments’ and third party deductions would remain the responsibility for the employer / payroll department
- HMRC would then calculate the necessary tax and NICs deductions, making the net pay payment to the employee and the statutory deduction payments to the Revenue
- Where an employee is not paid by electronically (BACS etc), HMRC would still perform the calculation but the employer will pay the employee
- HMRC advised that the calculations of tax would be correct, as NPS will be up-to-date with their employment and earnings information and will be able to apply the correct coding
- Employers / payroll departments will not have to implement tax codes or, indeed, understand them. Everything will be handled by HMRC
- Information about the centralised deductions might not be included on the employee’s payslip, however, the employee would be able to retrieve this information with HMRC giving them access to their personal tax account
- Effectively, the payroll obligation is shared between employer and HMRC, and clear guidelines need to be drawn as to show which party is responsible for which function
This week’s ‘beginning’ of RTI ends here, with the HMRC consultation document on the table for discussion and response.
Next Week…..
RTI – The Consultation Response
Further Information
