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Real Time Information - the biggest change to payroll since 1944

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Wednesday April 3, 2013 at 9:00am

PAYE (Pay as You Earn) is the system whereby income tax and national insurance is deducted from an employee’s pay by their employer and paid over to HMRC on the 19th of the following month. The employee receives their salary net of tax and national insurance. The system must be effective because it has changed little since 1944. The key point of the system is to deduct tax and National Insurance before the employee has chance to spend it.

However, with effect from April 2013 HMRC will radically improve the system thus making it less susceptible to fraud and hopefully make it quicker to fix errors. Change to the system is also needed to support the new Universal Credit system intended to streamline benefits payments. It will also provide the Department of Work and Pensions with income details of everyone, including those claiming benefits.

Real Time Information for all SME’s from April 2013

The new system will be called Real Time Information (RTI) and as you could probably guess from the title, every time an employee is paid and hence PAYE and NI becomes due, that information will be transmitted in real time to HMRC.

It is in the employer’s interest to get the information transmitted accurately the first time round. This is because each transmission will be compared with HMRC data held on the National Insurance and PAYE Services (NPS) database. It is not clear what happens if the data does not match, however filing online will become difficult and the next step is an HMRC compliance check. This is another good reason to ensure you have HMRC tax enquiry insurance in place.

More work for the employer

You may wonder what HMRC does, after all most taxes are collected by the taxpayer - VAT, PAYE and self assessment being cases in point. With RTI the employer is going to have to do more work still in order to avoid a mismatch of data under the more stringent new rules. It may be necessary to check new employee details against passport, birth certificate or Department of Work and Pensions documentation. Apparently it is quite commonplace for employers to use obviously incorrect details such as A N Other, Dummy1. Or AA000000A for names and National Insurance numbers.

What will be stricter under Real Time Information?

  1. It is not unknown for individuals, typically directors, to be paid by bank transfer and then the payroll records updated at the end of the financial year. This will no longer be possible as all pay must be reported in the month it is paid.
  2. Backdating payroll information to put good an overdrawn loan account will again not be possible as the payroll record is created when the transaction actually takes place, not when the paperwork is dated.
  3. It will be interesting to see how this develops but there is an argument that a debit to an employee loan account is actually a payroll payment that has not been correctly documented. Hence a properly constituted loan agreement with the company would be a sensible course of action when a loan to an employee is created.
  4. People paid under the NI threshold such as a part time spouse working in the business will no longer be able to simply enter the transaction in the accounts of the company and put the payment on the year end P35. Each payment must be properly reported under RTI.
  5. Should a company become insolvent and there be a large overdrawn loan account to a director the excuse that this is a payment in lieu of salary will be much harder under RTI. Again the payment to the individual should be reported to HMRC as it is made and not when the company goes into liquidation.

It will be interesting to see how RTI works as it is a huge responsibility for companies to get right from the start. This is especially true as HMRC have implemented the change across the board for all SME companies with no real support or lead in period.

If you are struggling with Real Time Information (RTI) or concerned about overdrawn loan accounts talk to your accountants now. You only have until the end of this month before your first RTI return must be filed.

Andy Parker
Chartered Accountant, Birmingham

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