In July 2010 HMRC issued a Consultation Document looking at a major reform of the PAYE system using real time information.
The project consists of two separate elements:
· Real Time Information (RTI) would collect information about tax and other deductions automatically each time employers ran their payroll. This information would be submitted automatically to HMRC at the same time employees were paid.
· Centralised Deductions (CD) would build on RTI by moving the responsibility for calculating and deducting tax, national insurance and student loan repayments from employers to the electronic payment system.
It appears that the Government have decided to proceed with a phased introduction of RTI with a pilot beginning in 2012 and then implementation from April 2013. It also appears that CD will only be considered once RTI has been fully introduced which seems unlikely before 2015.
With RTI, employers paying employees electronically would send details of employees’ pay, the deduction of tax, NIC and Student Loan repayments along with information about employee’s identities. The information would be produced automatically by the payroll system at the point of making the payment and would be sent to HMRC via the electronic payment system as part of the instructions.
HMRC believe that this could simplify the process when people change jobs, with no need to complete a P45/P46 but with a notification through the electronic system. Individuals changing jobs in the year would be more likely to pay the right amount of tax. They could also do away with end of year information submissions! Access to real time information would also improve the benefits and tax credits system, with better administration and reduction in fraud, error and overpayment.
In essence the process would be:
· Employers would be required by regulation to use the Bacs system to transmit RTI information with payment instructions.
· A common standard will be used for the transmission of RTI data at all stages of the payment infrastructure from payroll software through banking interfaces and Bacs submission software to the Bacs system itself.
· Smaller employers (fewer than 50 employees) who do not pay their employees via Bacs will initially be able to submit RTI from their software or Via an agent , using an internet channel through the Government Gateway
· Employers would still need to issue payslips to their employees and issue P60’s at the year end.
The basic concept would appear to be that HMRC would construct a central calculator to work out the correct deduction of tax, national insurance and student loan repayments from an individuals pay. The employer would send the gross payment through the electronic payment system to the central calculator where the deductions calculated by HMRC would be made automatically. The resulting net payment would then be sent to the individual’s bank account and the deductions would be paid directly to the government. As employers would no longer be responsible for the tax they would not need to operate tax codes!
Obviously things are in their infancy and there will be a lot more information to come in the future months. We will keep you fully informed of developments including how both Pegasus and Sage plan to deploy the required changes.