1 Unit
CPD technical article
David Harrowven provides a summary of the most important aspects of RTI
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The need to raise revenue for the Second World War effort saw the number of taxpayers increase from ten million to fourteen million. This growing number of taxpayers required a more efficient tax collection system than annual or six-monthly collection, so in 1944 the Pay As You Earn (PAYE) system was introduced. However, the system has struggled to cope with 21st century working practices where employees may move frequently between short-term contracts, or may work for several employers at the same time.
In July 2010 HMRC issued a consultation document on reforms to the PAYE system. Two separate elements were considered. Real time information (RTI) would collect information on tax, NICs and other deductions each time a payroll is run, and then submit this to HMRC when employees are paid.
Centralised deductions would build on RTI with responsibility for calculating tax and NIC being taken over by HMRC. HMRC would receive the gross payroll payments from employers, make the necessary deductions, and then send the net payments to employees' bank accounts. Responses to RTI were generally favourable, but opposed to centralised deductions. This aspect has therefore been postponed, and there are currently no are implementation plans.
Many aspects of RTI are quite detailed, such as the reporting requirements, so it is therefore only possible to provide a summary of the more important aspects. The focus is on smaller employers since RTI impacts on them far more than larger employers who are already using payroll software.
The PAYE system up to 2012-13
At the start of the tax year HMRC issued a tax code for each employee. This was then used by the employer to calculate how much income tax was due each time an employee was paid - normally weekly or monthly. The income tax deducted, along with NICs, was paid over to HMRC on a monthly basis - but small employers could instead make quarterly payments.
Following the end of the tax year, the employer had to submit a form P14 for each employee, showing pay and PAYE amounts. A summary form P35 was also required. Most employers were required to file these forms online. Employees employed at the end of the tax year were given a form P60 containing the same information as form P14.
An employee leaving during the tax year was given form P45 showing pay and PAYE amounts from the start of the tax year to the date of leaving. A new employee would either provide a form P45 from their previous employment, or (if there was no form P45) complete form P46. Form P11D (or form P9D) had to be completed after the end of the tax year for employees provided with benefits or in receipt of expense payments.
RTI - The basics
The fundamentals of PAYE itself are unchanged, so employees are still issued with tax codes, and the employer is still responsible for deducting income tax and NIC. The due dates for paying tax and NIC to HMRC remain unchanged, and it is still possible for small employers to pay quarterly.
However, with RTI the employer must report details of pay and deductions to HMRC every time employees are paid. This is known as a full payment submission (FPS), and must be submitted either before employees are paid, or at the time of payment. RTI allows HMRC to update tax codes more frequently, and since PAYE is now more accurate there should be less need for repayments and tax demands after the end of the tax year. RTI is also essential to the introduction of universal credit which has started to replace income-related benefits and tax credits from April 2013.
Forms P35 and P14 are not required, since end of year information is included within the final RTI submission for the tax year. However, form P60 must still be provided to employees. Where an employee starts or leaves then the relevant information is provided as part of the RTI filing process. However, form P45 has been retained, so this must be provided to a leaving employee. Benefits and expense payments remain outside the scope of RTI for the time being, so forms P11D and P9D are also retained. Employers continue to complete these forms as appropriate.
One other thing that has not changed is how employees are actually paid, so payment can be by cash, cheque, or any electronic basis.
Timeline
Most employers have begun reporting PAYE in real time from 6 April 2013, with RTI being mandatory from October 2013. The first step with RTI is that of payroll alignment, and for smaller employees this is normally done as part of the first FPS. Alignment is necessary to ensure that the employer and HMRC hold the same information for each employee. If a FPS contains incorrect information then it will be rejected.
So before moving to RTI an employer should ensure that their employee information is accurate and up to date - full name, date of birth, national insurance number, gender and address. And this should ideally be verified to an official source.
With RTI it is also necessary to report the number of hours an employee works each week, and this information may not have previously been recorded by the payroll system. HMRC requires the number of hours worked for tax credit/universal credit purposes, and for each employee it is a matter of selecting the most appropriate of four banding.
Reporting
For employers that previously used payroll software, moving to RTI will largely have been a matter of ensuring that the software is up to date for RTI. Most payroll software reports payroll information to HMRC via the Government Gateway.
Employers that previously produced their payroll manually can no longer do so as RTI information must be filed electronically. These employers will either have had to start using payroll software (some of which is available for free), or will be using the services of a payroll provider. One option for employers with no more than nine employees is to use HMRC's Basic PAYE Tools package. Although not a full payroll package, this will work out PAYE deductions and report the relevant information to HMRC.
Previously, it was not necessary to report PAYE details where an employee earned less than the NIC lower earnings limit. With RTI, if an employer is operating a PAYE scheme (because there are other employees earning more than the lower earnings limit) then PAYE details have to be reported for all employees - even those earning below the lower earnings limit. This change has been made because the information is needed as universal credit is introduced.
Problems and solutions
Take for example a small business with one employee who is paid a fixed weekly wage. Previously, it was a simple matter to work out the PAYE deductions (the same figures could be used each week), pay the deductions on a quarterly basis, and file the year-end returns using the Government Gateway. But with RTI, a FPS is required every week of the year, increasing the cost if the services of an accountant are used. HMRC has responded to this problem by introducing a temporary reduction to the reporting requirements for businesses with less than 50 employees. So a small business that pays its employee weekly is permitted to just submit one FPS at the end of the tax month. This relaxation was originally going to run for the first six months of 2013-14, but it is likely that it will be extended to the end of the tax year. In future years, it might be possible to move the employee to a monthly salary so as to reduce the number of FPSs. It is also possible to minimize costs by submitting several FPSs together, but care must be taken here given that payroll details could change or the employee could leave.
The same problem is faced by directors of owner/managed companies who take director's remuneration sufficient to use their personal allowance, with the balance of income withdrawn as dividends. One possibility is to use an annual PAYE scheme as this avoids the need to complete nil payment notifications. The director is paid in a single tax month each year, with just one payment made to HMRC. An alternative is to again file several submissions in advance. For example, April, May and June could be filed together prior to the April deadline, tying in with the quarterly payment to HMRC.
Businesses with a fluctuating, weekly paid, workforce have been the most affected by the introduction of RTI - typically, those in the catering and entertainment sectors employing casual staff. HMRC has introduced a seven-day grace period before having to report pay, but this only applies to certain employees -such as casual employees and piece workers.
Penalties
For 2013-14, no penalties are charged for late FPSs provided employee information reaches HMRC by a final deadline of 19 May 2014. However, inaccurate FPSs made during the year could attract a penalty if the employer has not taken reasonable care.
There is no change to the penalty regime where monthly or quarterly payments of PAYE are made late.
Conclusion
At the time of writing, more than 1.4 million PAYE schemes out of some 1.6 million are already operating RTI, and despite teething issues it's looking as if the introduction of RTI is proceeding as planned.
1 Unit