Payroll - Real Time Information on the way

The change is bound to have teething problems, but in April this year HMRC began a pilot which should help smooth the process. Helen Hargreaves, senior policy and research officer at the Chartered Institute of Payroll Professionals, reports

The next 18 months sees the most fundamental change to Pay As You Earn (PAYE) reporting since its inception in 1944.

As the title suggests, under Real Time Information (RTI) employers and pension providers will tell HMRC about PAYE payments at the time they are made as part of their payroll process. Payroll software will collect the necessary information and send it to HMRC online. Whilst the structure of PAYE remains the same, RTI fundamentally changes the way in which information is reported to HMRC. And these changes will affect all employers, regardless of whether you work in the public or private sector, are a large or small employer.

Background
The first official mention of change came in July 2010 when HMRC published a discussion document to gather input from employers, payroll bureaux, agents and other stakeholders with a vested interest. This document explored the option to move to a system that collects information on PAYE deductions at the time employers pay individuals, namely RTI. The second stage of consultation was then published in December 2010. 

Objectives
Throughout, the Government’s objectives have remained static - to reduce costs both for employers and for HMRC by making the system easier to administer; to improve service levels for individual customers and to ensure accurate and timely tax deductions.

HMRC do admit that PAYE works well for the majority of people, particularly those with stable circumstances, but because processes have basically remained unchanged since they were introduced, there are some limitations. For example it is common now for people to have more than one concurrent job or pension, or have unpredictable employment patterns.  As information only goes to HMRC once a year they are always playing catch up with these individuals’ tax affairs. The Department for Work and Pensions (DWP) is overhauling the UK benefits system and is introducing a Universal Credit system which will combine many of the current benefits, tying in with the Government’s ‘make work pay’ policy and helping to break the cycle of benefit dependency. RTI will support Universal Credits by providing the Department for Work and Pensions (DWP) with up to date information about a claimant’s employment income so DWP can calculate the correct Universal Credit payment throughout the year.

Deadline
The Government has set a deadline of October 2013 for the introduction of Universal Credits. Because of the role RTI will play in supporting Universal Credits, all employers and pension providers must have switched to RTI reporting by this date. 

What is changing?
Employers and pension providers will send RTI returns to HMRC each time they pay their employees or pensioners, rather than waiting until the end of the tax year.  This means that employers will be required to send information to HMRC about their employees’ pay and deductions, before or at the same time as they are paid. Employers will no longer need to submit an End of Year Return (P35, P14 or P38A) to HMRC. There will be no requirement to complete or send form P45 to HMRC when an employee leaves, or form P46 when an employee joins.

What stays the same?
The basics of the PAYE system, such as calculation of PAYE, deductions from payments and the frequency of payments to HMRC of PAYE and NICs will stay the same. And employers will still have to provide each employee with a P60, report expenses and benefits on form P11D and pay Class 1A NICs using form P11D(b), provide leavers with a form P45 to be given to a new employer and for the employee’s records and obtain P46 type information from new starters.   

Employers who are submitting RTI returns should note that P45s and P46s should not be sent to HMRC. Starter and leaver information will be reported by employers as part of their normal RTI submissions.

Piloting RTI
As this is such a huge change, there are bound to be teething problems, but it is reassuring to know that in April this year HMRC began a pilot, possibly its longest ever, which will run from April 2012 through to April 2013. In the first month of the pilot HMRC will progressively bring in 10 employers, representing a range of size, type and payroll software, with the aim of testing the system and support to optimise performance and iron out any issues.

A further 300 employers will join the pilot during May / June 2012 followed by 1300 in July 2012.  Subject to the initial pilot being successful it is hoped that around 250,000 will have been brought in between September 2012 and March 2013. RTI will then become mandatory and all other employers, without exception, will be directed to join from April 2013 through to October 2013.

Improving the quality of data
When HMRC introduced the National Insurance and PAYE service (NPS) a few years ago, it identified many thousands of tax code errors.  The resulting notifications of over or underpayments caused a media furore, but were actually just proof that although HMRC’s systems had held incorrect data, the new system was identifying them and taking steps to correct individual records.  HMRC data is now more accurate than it has ever been before.

Analysis shows that the key issue is in matching the data sent by employers with HMRC’s records. Around 80 per cent of errors in employee data are due to an incorrect name, date of birth or national insurance number.  This is information which can be collected and checked quite easily, but it is vital that it is also in the right format for RTI purposes. 

HMRC is stressing the importance of putting good procedures in place to ensure the employee data is correct and has offered the following advice on how data quality can be improved:

An employee’s/pensioner’s date of birth should be recorded in an eight number format to include the day, month and full year of birth. Made up dates must not be used.

An employee’s/pensioner’s full forename must be given, not just their initial. Forenames and surnames should be the right way round and spelt correctly.

If an employee’s/pensioner’s NINO isn’t known or there are doubts about the validity of the NINO supplied, the HMRC National Insurance tracing service can be used to locate the correct number. Never make a number up.

Employers/pension providers should ensure they have the correct employee /pensioner details by checking the information they need with an official source. These include: HMRC and/or Department for Work and Pensions documentation, passport documentation and birth certificates.

Employer Alignment Submission (EAS)
The first requirement under RTI is to align employee details with the data held by HMRC.  Larger employers will do this by completing an EAS. The EAS must include details of not only active employments, but also any starters and leavers in the current tax year.  So an EAS submitted in August 2013 would include details of any individual employed since 6 April 2013, regardless of whether they have since left the employment.  In most cases HMRC will update their database with the details from these submissions. 

Full Payment Submissions (FPS)
The FPS is the main RTI submission per PAYE scheme that employers will use to report pay and deduction details for those employees paid on that payday. Once the EAS has been successfully submitted, the employer is considered to have joined RTI and can start sending FPS submissions immediately. 

Employer Payment Summary (EPS)
This submission gives an employer the opportunity to adjust the payment due to HMRC, for such reasons as recovering statutory payments, NICs compensation on statutory payments etc.

All these issues affect all employers, regardless of size or sector, but two factors mean the NHS will be particularly impacted. Firstly, the sheer number of staff in the NHS itself. The NHS is the largest employer in the UK, with over 1.4million people working within in it in England and Wales representing 7 per cent of the population. Secondly, the complexities of the NHS– it is referred to as a single organisation when it is in fact made up of 436 individual organisations.

These two reasons together put the NHS in a fairly unique position in general, and coupled with the requirements of the RTI legislation, certainly requires careful handling. 

Multiple Roles
Frank Rutley, ESR programme director and vice president, UK Workforce Solutions, McKesson UK says that the NHS employs over 1.4 million people, but these people also have multiple employments/assignments and job roles across trusts, which accounts for the 2.08 million payslips per month that are produced. This giant employee pool is also very fluid, and the junior doctor changeover is a good example of this – as part of their training, junior doctors can rotate every 3, 4, 6 or 12 months.  This may mean different job roles within the same trust, different job roles in different trusts, or the same job role across different trusts. They may also return to the same trusts time and time again.  RTI should in theory manage this in a positive manner, taking into account this movement and reducing some of the previous challenges and difficulties experienced with the aggregation of both NIC earnings and Income Tax. Approximately 300,000 people move around within the NHS every year.

The NHS is also fairly exceptional in the way it runs its payroll – there are multiple frequencies (weekly and monthly) but there are also multiple payroll runs within these frequencies such as leavers and supplementary runs. This means that there will be multiple RTI files to manage. HMRC requires an EAS file for every trust, an FPS file for every BACS run, and it is likely that larger trusts will also need to submit an EPS file every month. To put this into perspective, 17,518 NHS Electronic Staff Record (ESR) files were transmitted to BACS in 2011 – with a total value of £28,205,886,627.02 so McKesson are projecting that they will be generating and transmitting in excess of 18,000 RTI files per annum on behalf of the NHS.

Further information
www.cipp.org.uk
www.hmrc.gov.uk