Join the real world

KEY POINTS

• Administrative burden on employers will not be reduced by real-time information.
• More frequent payroll runs required.
• Impact of universal credit.
• Change the rule to, say, monthly reporting.

I am an accountant, so I like reconciling things and there is something troubling me currently that I cannot reconcile. It may be that you will be able to do so, in which case I hope you will explain it to me.

On the other hand, perhaps you will find it as hard as I am and, in that case, you may want to join me in voicing your concern.

First, the government has explicitly recognised the need to cut business red tape. In the autumn statement Green Book at paragraph 1.125, it says that it will operate a “one-in two-out rule” from January 2013 which will require “the cost to business of new regulation to be offset by deregulation that delivers at least double the savings to business”.

This is a very welcome statement of a very worthy ambition. It has my full support.

Second, a real-time information (RTI) tax information and impact note issued on 15 March 2012 states that HMRC estimate the annual net savings to business resulting from the move to RTI at £300m from 2014/15. Now, there is no problem in reconciling those two things is there?

Well there is a hint that there might be a problem in the impact note, when it goes on to say:

“it is acknowledged that some employers who operate PAYE will face an additional cost because under RTI they will need to report payments made to all of their employees, including those paid below the National Insurance contributions lower earnings limit.”

HMRC do not apparently – and worryingly – hold the data needed to estimate this cost.

Talking point

This was the point at which I sat down with my colleagues in our payroll department to talk through the effect that RTI would have on our clients. We handle around 250 payrolls, all for small businesses.

The more we talked, the more concerned we became. We decided to schedule – we are accountants after all – the payroll tasks we undertake for each client and the tasks we expect to have to undertake for the same clients under RTI.

We then totted up the extra time requirement. It was the equivalent of one new full-time member of staff.

Now you could say “great – extra fees” but that is where I have my reconciliation problem.

How can I reconcile the impact note’s statement that “RTI aims to reduce administrative burdens for all employers, including small employers (upon whom the current burden of PAYE currently falls disproportionately)” with the additional cost I will be passing on to my clients?

I suspect many readers will have a client base very much like my firm’s, including small and very small businesses already struggling to cope with the administrative burdens imposed by successive governments.

The root of the problem is the rule that an RTI transmission must be made on or before the time a payment is made to an employee.

When I gave evidence to the House of Commons Treasury Committee last October, I described the on or before rule as “absurd”. That is a strong word for me, but the rule is absurd. In fact, it is unworkable.

Things have moved on a little since then and the rule has, as a result of HMRC listening to the Tax Faculty and other professional bodies, been relaxed to an extent so that certain payments can be reported within seven days rather than on or before payment.

But the relaxations are very limited and, while they might remove the absurdity, they do not remove the additional burden being imposed.

I also said in my evidence that I found the idea that RTI is going to reduce employer compliance burdens utterly bizarre. It cannot reduce the employer’s compliance burden. It increases it.

How much of a problem?

If you do not yet share my concerns about RTI, here are some points to start you thinking.

Consider the client with a monthly payroll and some low paid employees who get a weekly advance. If the advance is on account of pay and not a loan, there is an obligation to report within seven days. Twelve payroll runs a year have just become 52.

Then there is the client with one employee on a regular monthly salary and two or three employees paid irregular amounts below the lower earnings limit for a few hours work each week. Currently, this requires a monthly payroll and an annual P38A.

Under RTI, the amounts that would have been reported on the P38A will have to be reported in the same way as any other payment. Again some clients will move from a simple monthly payroll to a weekly payroll because of the requirement to report within seven days.

An example would be the pub landlord who regularly has to call in casual staff at the last minute on a busy night. In practical terms, this will mean more phone calls, more faxes, more emails, more time, more burden.

Finally, take a director-only payroll. Currently the director maintains a deductions working sheet and pays himself monthly.

At the end of the year, we submit the P35 for him. There will be no P35 under RTI. There will be 12 payroll runs instead.

There is a carve-out in the relaxations published late last year as a result of representations by the professional bodies, for ad hoc payments, but HMRC say:

“Payments on account of earnings are not considered to be ad hoc where it is established practice for some earnings to be paid outside the normal payroll cycle, eg where overtime is always paid more frequently than the basic salary or wage payments.  Such payments must be reported on or before the time they are made.”

That will again affect a significant number of small employers.

You can find all the carve-outs online. You might like to look at the carve-out described for payments that vary according to the work done on the day, where it is impractical to report on or before.

By now I hope you will see why I am finding it difficult to reconcile the impact note’s aspiration “to reduce administrative burdens for all employers, including small employers (upon whom the current burden of PAYE currently falls disproportionately)” with what my payroll colleagues are telling me about the small employers they are dealing with.

The impact note says that the objective will be achieved by “integrating employee payment and reporting to HMRC into a single payroll process”.

The software will make the RTI transmission an automatic part of operating the payroll, but if you force employers to increase the number of times they have to report, you increase the burden.

To put it another way, the problem is the number of times you have to run the payroll, not the integrated transmission.

How much extra tax and National Insurance will the on or before/within seven days rule generate? Not one penny. It is bound to encourage small employers to be economical with the truth, it is to be hoped not about what they pay, but certainly about when they pay. That cannot be a good thing for tax administration.

The idea that forcing employers into more frequent reporting will somehow help them keep better records does not convince me: I do not think the quality of the records will change, but I do think the temptation to fudge them to make reporting less onerous will increase.

The belief that it will make some employers do what they should already be doing also fails to convince me.

If what they are currently doing delivers the right amount of tax and National Insurance, why is there any need for change?

Really necessary?

The “need” for change is that the Department for Work and Pensions (DWP) wants payroll information as close to real time as possible for means testing the new universal credit state benefit.

Hence the on or before/within seven days rule. Yet the DWP is happy for the self-employed to report monthly, even if it is on a basis that suggests no understanding of how businesses actually operate. The logic eludes me.

So there you have my reconciliation problem.

Can it be solved? Yes, if the government, particularly the DWP, accepts that the burden the on or before rule, even with the recent relaxation, imposes on smaller businesses is at odds with its stated aim to reduce the burdens on small businesses.

Monthly reporting would solve a very large part of, but not all, the problem for many small businesses.

One of the fundamental things HMRC and the professional bodies have achieved through the joint initiative on service standards over the past year is a clearer view of problems by seeing them through each other’s eyes.

We did that by getting people from HMRC into practitioners’ offices and practitioners into HMRC offices.

As a result, we had a much improved P35 process, with far more employers avoiding penalties. We also had agreement to publish call centre statistics and to reallocate £34m of resource to improve call centre performance.

Seeing problems through each other’s eyes helped HMRC to deliver real change. We need to make that process routine on all service delivery areas and RTI is the ideal next candidate.

For that reason, the Tax Faculty and the Chartered Institute of Taxation recently provided HMRC with the names of some volunteer practitioners operating payrolls for smaller businesses, so that HMRC can visit them to hear at first hand about some of the practical difficulties that will arise.

I hope the visits will help them to see what actually happens on the ground and to ask the simple question: “If this is adding new burdens and delivering no additional tax, how can it be consistent with the government’s aims on deregulation?”

The problem though is that it is not really HMRC we need to convince; it is the DWP. We need to extend the challenge to see things as they are to the DWP as well.

HMRC have done the right thing in testing the system by way of a gradually expanding pilot phase. That is to be commended.

The problem is that the employers I have concerns about are not in it: they would be crazy to volunteer to add to their business costs before they need to and for that reason they haven’t joined.

The pilot has therefore proved the technology and many of the new processes, but not, I fear, the practicalities facing many small businesses.

For the avoidance of doubt, I am not against RTI per se. I have been a long-time advocate of harnessing information technology to improve tax administration and I have not changed my views. Real time reporting of earnings and benefits is a logical step.

I also see the sense of integrating this information into the benefits system so that benefits can be based on more up-to-date information.

There are, however, features of RTI that, unless they are rethought, will impose new, pointless and unproductive burdens on smaller businesses.

The on or before/within seven days rule is the main problem. Relaxing it would not wreck RTI; instead it would help make RTI work in the way the impact note said ministers want it to, by “integrating employee payment and reporting to HMRC into a single payroll process”. It just needs a sensible frequency for that payroll process.

When she gave evidence to the House of Commons Treasury Committee in October, Lin Homer said that I would give HMRC “grief right to the end” on RTI to help HMRC make it as good as possible.

I do not want to give anyone grief, I want to see the successful creation of a system that works efficiently and effectively without creating pointless new burdens for smaller businesses.

I cannot really sum it up better now than I did in my evidence to the Treasury Committee back in October. I said:

“I really feel some attention has to be paid to this idea of ‘on or before’, because in the real world it cannot be done by many small employers. The sooner that problem is recognised and the sooner DWP recognises that it has to accept that, the sooner we can actually move to an RTI system that will work.

“If DWP does not recognise that, and insists that HMRC carries on insisting on ‘on or before’, what will actually happen is either HMRC will have to levy penalties on all those employers who cannot do it, and there will be lots of them, which is not going to be a great place for HMRC to be, or it has to turn a blind eye to non-compliance.

“Would it not be far more sensible just to accept the real world the way it is, and do something for those small and medium-sized businesses that cannot actually do this? There is a simple answer. Does it really have to be on the day reported?

“Why can’t we just report on the 19th of the month? That would remove the bulk of this problem. It would enable small and medium-sized employers to comply fully with the law. It would stop HMRC having to levy penalties on people who are trying their damnedest to comply, but who cannot, because it is not the way the world works.

I cannot honestly believe that universal credit would fall over simply because information is coming through on the 19th of the month, rather than this absurd idea that universal credit has to operate on the anniversary each month of the first initial claim.”

This is important

If you think I am barking up the wrong tree, please tell me. If you share my concerns, you might consider writing a letter to your MP explaining how the on or before rule will affect one or two of your business clients in your MP’s constituency and asking whether the end really justifies the means.

We must make headway on this on or before the day it all starts in earnest this April. It is not far away.

Issue: 4388 / Categories: Comment & Analysis , RTI , Admin , Employees , Income Tax