Paye - real time information is here

Are you up to date with RTI? You need to be, says finance expert Tina Riches.

Since April, a project launched by the Government to overhaul the way PAYE works is having a huge impact on all employers. However, despite it having been on the tax radar for some time now, a good number of British businesses are "still in the dark" about the changes, according to the Forum of Private Business. 

PAYE has been around since 1944 and was originally set up to aid collection of taxes during the war. However, what worked in the 1940's increasingly couldn't cope with present day working patterns. 

For those not yet familiar with the RTI acronym, it stands for 'Real Time Information' and it is going to make a fundamental change to the way payroll information is processed and reported to HMRC. As of  6 April 2013, most employers will have had to return information online to HMRC under RTI, with all employers required to join by October 2013.

HMRC have for some time wanted to be able to receive up-to-date information on pay and tax deductions instead of having to wait until after the year-end. With RTI, HMRC will be able to see how much PAYE, national insurance and student loan deductions are due from each employer each month.

RTI will inevitably help HMRC to improve tax compliance by employers; it will enable it to chase employers earlier in the process and, where appropriate, impose penalties for late in-year (current) PAYE payments. Once RTI has bedded in, it should allow HMRC to improve the tax code process. This should in time mean that more accurate tax deductions are made, which will be good news for many.

However, the main purpose of RTI is to provide a real-time feed through to the Department of Work and Pensions to calculate the new Universal Credit payments that are due to start in October. For employers and tax agents, as well as employees, it will be crucial to understand the link between pay and Universal Credit (UC).

No doubt employees will be raising queries with their employers and agents, once this all takes off. But the key point is that as UC payments will be geared to an individual's current income, that has resulted in the "on or before" requirement: that whenever an employer receives pay, then on or before the payment is made, the employer needs to report the payment to HMRC. 

All employers will need to think about how their computer systems will cope with this change, and how they collect and collate relevant employee information. One key area is the cleanliness of data. RTI will require transmission of an employee's full and given name. Robert Patel can no longer be recorded as R Patel, Bob Patel or even Patel B. It is therefore important for employers to check that they have the correct name. Other information that will be sent in an RTI submission includes the employee's national insurance number and other personal data such as their date of birth. Once an employer is in RTI, a passport number will be required for new employees.

It's worth bearing in mind that HMRC will also be able to easily see if employers have not paid the right amount on time. This could present serious problems for employers with cash flow issues. 

On a positive note, despite the work required the year-end forms (P35, P14a and P38As) will no longer be needed, and businesses won't need to send P45s to HMRC, or complete a P46, though they will need to collect the P46 data for all new employees. Employees will still need a P60, and expenses and benefits will still need to be reported on a P11D/P11(b) though. Reporting will be more frequent, but the new system has been designed so that software will do much of the work, once the data has been collected. That, of course, assumes the employer uses commercial software to their payroll. Those who use variants of excel spreadsheets or old-fashioned working sheets will find they have a lot more to do.

And, crucially, remember that on or before requirement. Many employers who traditionally accumulated wages payments during the month and sorted out their PAYE returns after the month end will find that isn't good enough. 

Many small businesses outsource payroll work to their tax adviser. Employer and agent need to get together now to sort out how they are going to meet the on or before requirement. Unless employees are all simply paid at the month end, at a minimum it will probably mean more regular information flow from employer to agent... and potentially higher fees for increased numbers of submissions to HMRC. 

For some employers with dedicated payroll departments, once the updated software is in place and the initial return filed, it should be a case of pressing a button each month to send the required information to HMRC each time the payroll is run.

However, for many employers it is not likely to be quite as simple as this. Some employers, say small firms with no payroll department and those with "casual" or "unusual" employees, will find that RTI presents them with real challenges.

Typical situations that need to be looked at now include:

l Employers who rely on their tax adviser to submit the end of year return and notify them of any corrections;

l Employers who rely on a tax adviser or bureau to run their payroll. They will need to agree with their agent whether to give the agent the authority to make the regular submissions to HMRC without reverting to the employer for approval;

l One/two-man companies that pay directors annually but which make payments during the year that are, for example, netted off against the directors loan account credit balance;

l Employees who receive advances of salary during the month;

l Small employers who account for PAYE quarterly, particularly where the payroll is worked out quarterly but employees are paid monthly by standing order;

l Manual payrolls; and

l 'Unusual' employees, for example, casual staff and daily paid workers.

For those that have not started to think about how RTI will affect them, the message is start doing so - and quickly. Those businesses that have someone else run the payroll on their behalf, need to think about how the lines of communication will work. For example, who is going to be responsible for transmitting information to HMRC each time employees are paid?

l More information is on the HMRC website at: http://www.hmrc.gov.uk/payerti/getting-started/index.htm - this page is becoming a 'landing page' for the various guidance and technical notes as these are developed.

Finally, there has been some relaxation, with an announcement on 19 March that firms with less than 50 employees can, until October at least, submit RTI information once a month (in line with PAYE payments) regardless of actual payment patterns. This relaxation will not last forever though.