The introduction of PAYE RTI in April 2013 fundamentally reformed Pay As You Earn tax reporting, requiring all UK employers to notify HMRC of their liability to PAYE at the time or before they make payment to their employees. Payroll software collects the necessary information and sends it to HMRC via the Government Gateway. It represents the largest change to PAYE since its introduction in 1944, where previously employers paid tax and National Insurance contributions due to HMRC on account but only declared and reported their actual liabilities to these sums at the end of the tax year in a P35 return.
All employers are now required by law to submit an RTI return every time employees are paid as part of payroll arrangements. Pension providers are also affected. Although there is still some leeway for the very smallest employers and new employers when submitting their very first RTI return, the vast majority of employers or their payroll agents are now reporting PAYE information to HMRC in real time.
The Government’s commitment to the reform of the welfare system through the introduction of Universal Credit requires employee earnings data in real time. PAYE RTI enables HMRC to pass earnings data to the Department for Work and Pensions, so that Universal Credit claims can be assessed based on accurate employee income amounts. The introduction of Universal Credit has dictated the timescale for HMRC’s introduction of PAYE RTI.
Data from RTI is being used to support the administration of Universal Credit in many Job Centres, and the national accelerated roll-out of UC (which began in February 2015) will see UC in over 80% of UK Jobcentres by December 2015. RTI data is also helping to eliminate fraud and error in the benefits system, and the Chancellor announced in the March 2015 Budget the intention to make wider use of RTI data to further improve these savings.
At a Glance
- All UK employers (and pension providers) are affected
- Payroll software submits statutory PAYE returns to HMRC
- Requires RTI compliant payroll software or use of HMRC's Basic PAYE Tools
- Utilises Government Gateway IT infrastructure
- Penalties apply for failure to submit returns and for submitting returns late
- Late payment of PAYE and NICs also penalised
- All employers now in RTI - very limited relaxations for some of the smallest only
- RTI returns need to reconcile with employee payments
- BACS users include an additional piece of data in their BACS payment file
Long Term Strategic Channel Choice - BACS
HMRC have previously made clear a preference for BACS in the longer term as the strategic channel for employers to submit their RTI returns at the same time as they make payment to their employees, because BACS terminates 92% of the working population’s salary credits. HMRC’s original preference for BACS arose on the grounds that it offers the most reliable and lowest cost platform for managing the significant volume of data RTI generates. Use of this channel would have meant the proven national banking payment system rather than Government IT infrastructure is used for reporting PAYE RTI.
The significance of the BACS strategic RTI reporting channel was that employers could submit their payment instructions and RTI return to HMRC simultaneously in a single (BACS) file submission: the return would be validated by the payment to employees and the payment reconciled to the return, significantly reducing the risk of fraud.
In the context of RTI, BACS or 'direct BACS', means that employers initiate payments to their employees through the BACS network by using a BACS Service User Number (SUN). This is different from making payments by internet or telephone banking or otherwise instructing the bank to make payments: direct BACS receipts both the instruction to pay as well as the payment, where all other payment methods only use the BACS network to credit the recipient's bank account.
HMRC’s ‘Interim Solution’
HMRC decided in July 2011, after representations from payroll software providers, to introduce an Interim Solution in advance of a final decision on the strategic RTI solution.
Under the Interim Solution, employers submit their RTI return for each pay cycle directly from payroll software over the internet via the Government Gateway, without having to use BACS, and HMRC started to pilot this Interim Solution in April 2012.
For employers using BACS, RTI payroll software also generates the employer’s BACS payment file. This BACS payment file is linked to the employer’s internet RTI return, submitted to HMRC from the same software, via a unique reference. This reference, known as the ‘hash code’, is present in both outputs: the internet RTI return and BACS payment file, allowing HMRC to reconcile these two separate – but corresponding – outputs received respectively from the Government Gateway and the BACS network.
The Interim Solution therefore has two reporting options for the employer: an employer (or their accountant or payroll service provider) can comply with their RTI obligations by submitting a mandatory internet RTI return only over
the Government Gateway, or, for those using BACS, by also making a BACS submission in addition to the mandatory RTI return.
HMRC does not currently require employers to use BACS, and employers are under no obligation to do so. However, BACS does offer an independent means to employers to demonstrate that what they have paid to employees matches the amounts reported to HMRC on their FPS submissions, and also to evidence that they have reported ‘on or before’ the payment date.
HMRC has indicated that the Interim Solution, with employers making RTI returns over the internet from their payroll software, is its preferred solution which it plans to retain long term.
Major employers who use a direct EDI interface with HMRC had previously been advised by HMRC that the EDI channel would close in 2014, to realise the savings promised by a single strategic BACS channel. HMRC has now committed to support the EDI interface until 2016-17.
RTI penalties were due to begin in April 2014, one year on from its full roll-out. In response to concerns from employers and payroll agents about the stability of RTI systems and employer ability to manage the ‘on or before’ aspect of RTI reporting, HMRC delayed the introduction of automated penalties, although penalties could still be raised clerically for non-compliant employers.
Automated penalties for late reporting of PAYE information commenced in October 2014 for large employers (those with over 50 employees) and in March 2015 for smaller employers. In February 2015 HMRC announced in a press release that a three day penalty tolerance would be applied for late filing of returns, but stressed that there has been no change to the filing deadline: RTI returns must be submitted ‘on or before’ payment is made to employees. In this press release, HMRC also announced that automated penalties for late payment of PAYE and NICs, due to begin in April 2015, would not begin as planned and that these penalties would continue to be issued on a risk-assessed basis.
RTI penalties make it important that employers can demonstrate their efforts to comply with their RTI reporting obligations and that they have robust systems in place to support PAYE RTI compliance.
HMRC propose that penalties for inaccurate returns will be determined manually according to its own compliance checks. As in previous years, interest is chargeable by HMRC on unpaid sums of PAYE and NI, as well as on penalties raised in respect of those sums or failure to report on time.
What to Do
There are a number of things employers must do to ensure their payroll operation is compliant with RTI requirements.
PAYE RTI requires complete accuracy of employee data including name records, dates of birth, National Insurance Numbers and it is important this data has been checked and verified.
All UK payroll software has effectively had to become PAYE RTI compliant. Employers or their payroll providers with a software maintenance contract can expect their software to be compliant but should liaise with their software supplier to ensure this is the case. Any updates to payroll software which need to be installed to maintain compliance should be completed in good time.
Where payment is made to employees using direct BACS (the use of a Service User Number), employers must ensure that their software supports the production of the BACS hash sub-reference which is inserted into field 7 of the BACS payment report and is used to generate the full BACS hash (64 characters) in the Full Payment Submission to HMRC.
Employers should review their current payroll procedures and liaise with their payroll service providers or payroll software suppliers and assess whether their processes are fully PAYE RTI compliant, and if so that their compliance with their reporting obligations can be effectively demonstrated. Employers should be aware of the importance of ensuring that if not using BACS to pay employees the sums paid to employees, for example via internet banking, must always reconcile with their mandatory RTI internet return to HMRC.
PayeRti.org’s recommendation to employers is to ensure they have the systems in place to demonstrate their efforts to comply with their RTI obligations and ensure these efforts are adequately recorded and can be verified.
Although HMRC’s systems have thus far coped with the volume of submissions received over the Government Gateway, widespread concerns remain over its ability to accurately reconcile data collected from employer FPS submissions to the correct PAYE accounts and also to manage the allocation of payments it receives to these accounts. There are consistent reports of differences in liabilities reported by HMRC compared to what has been reported and paid by employers (and their payroll agents).
HMRC recognises that the costs of PAYE fall disproportionately on small business and PAYE RTI will continue this trend.
The UK accounting profession has voiced its concerns about the timescales and design of HMRC’s solution for PAYE RTI, and will continue to speak for the interests of UK businesses on this subject.