Update on Changes to PAYE System

Monday, September 13th, 2010

Published by Accountancy Age’s Tax Editor, Rebecca Benneyworth, below is her summary of the issues raised by the Treasury/HMRC consultation on real-time PAYE information and the phase 2 proposal for centralised deductions.

It seems a long time since we debated the proposed changes to the PAYE system, released for consultation on 27 July. The closing date for responses is 23 September 2010, and AccountingWEB.co.uk will be submitting a response to the consultation in the next week or so.

The responses to Rebecca Benneyworth’s last article setting out the proposals in some detail were pretty much split on whether the suggested developments would work or were even necessary, but of course developments since then perhaps shed a different light on things.

To recap briefly on the proposals; the consultation is entitled “Improving the operation of PAYE” and is centred on two premises :

That PAYE systems have essentially been unchanged since PAYE was introduced some 66 years ago and this means that in some respects the current system is not fit for modern employment patterns, and

That the new PAYE computer system – NPS – offers the chance to make some significant changes to the way PAYE is operated.
The objectives of any changes to be made are set out in para 2.2 of the consultation document :

To reduce costs for employers and HMRC by making the system easier to administer;
To improve service levels for individual taxpayers (customers); and
To ensure accurate tax deductions.

The recent furore over tax calculations (P800) being sent out to taxpayers in respect of 2008-09 and 2009-10 as a result of new capabilities introduced by the most recent phase of NPS is worth analysing against the backdrop of proposals to improve the system. A number of issues are clear :

The premise (expressed in comments on my last article) that “if it ain’t broke…” doesn’t stand up. If several million need their tax adjusted after the end of the tax year, then PAYE is quite clearly “broke”. This is not a result of HMRC “cock ups” or inefficiency, indeed this is a result of the tax authority doing a job which it has long been criticised for not getting around to – ensuring that taxpayers within the PAYE system have paid the right amount of tax. The lax attitude of employers to forms P45, the inappropriate application of emergency codes and indeed the failure by some employers to adequately engage with the process of getting their staff’s tax right, combined with economic mobility and the necessity of having several jobs means that the PAYE system just cannot cope. Unless some changes are made the current ruckus will become an annual event.

Any changes which generate significant levels of doubt and questions in the minds of individual taxpayers will need adequate staff available to provide support and detailed explanations if things go wrong. Unfairly perhaps, but Rebecca’s current view is that HMRC neither has the staffing levels nor the expertise to deal with this. Experience of manning a helpline dealing with lay taxpayers is that in order to enable them to understand tax issues, a very high level of knowledge and communication skills indeed is necessary.

There is a more general point to be made here – in fairness to HMRC. The level of understanding of the most basic tax (and NIC) issues in the general public is absolutely appalling. Visiting a local secondary school to talk about some basic tax education brought this home to Rebecca clearly. In planning a lesson to explain payslips, PAYE, tax codes and NIC it was clear that many of the teachers I met would also like to sit in on the lesson, as they knew little and understood less about their own tax position. This puts huge burdens on the tax authority when tax issues hit the headlines as most people are unable to check their tax code – even when provided with resources on HMRC’s website.

So where does all of that leave us? Lets go back to the main proposals :

Real time information

Under this part of the proposals, employers would provide information on gross pay, tax and NIC deducted in respect of every employee (including those paid below the thresholds) to HMRC as the payment is made. Employers who do not use electronic payment methods would be able to use an enhanced HMRC offering to submit the same information.

HMRC’s view is that this would allow NPS to keep better track of employees, issuing amended codes automatically and significantly reduce the number of employees needing an annual calculation. Other benefits of the system to Government have also been identified in that information can be made available automatically to other departments such as tax credits DWP in respect of benefit claimants.

An assessment of this proposal is that it is hard to resist – particularly in view of the current experience with P800’s. It imposes little change from the perspective of the employee. For employers, the additional information required can normally be programmed in by third party software providers and they are relieved of the burden of forms P45 and P46. The reduction in under and over payments is a significant benefit to all, and the additional provision of information for tax credit and DWP purposes has to be good news. There is slightly more work for employers to keep records for those staff paid below the tax and NIC thresholds, but this is manageable. Of course those employers keeping manual payrolls will have to change their ways but they already have to file online – this is just and extension of that.

Centralised deductions

This more radical proposal would lead to HMRC taking over the calculation of PAYE, NIC and student loan deductions, rather than passing the information to employers to allow them to perform the task. Without going any further into the offered benefits of such a proposal (which are set out in paras 5.11 to 5.18 of the consultation document) I see an immediate problem. The consultation document already identifies the information flows with employees as potentially tricky – with employees needing to understand which questions to direct at their employer and which to HMRC. It is not currently my belief that HMRC could cope with the potentially significant extra contact this would generate. Would it be correct to think it would generate additional contact? Strong belief is that it will – perhaps purely because HMRC is now in the “hot seat”; perhaps because current adverse publicity will lead taxpayers to distrust the tax authority.

In Rebecca’s view, the development of centralised deductions will not contribute to achieving the objectives set out above. On paper it could reduce costs for employers, and has the potential to make tax calculation more accurate. But a better substitute in my view would be a rigorous analysis of P800’s issued in respect of 2008-09 and 2009-10 and then action taken to address where the real issues lie. It is not, I suspect, with errors in calculation of tax and NIC per se. Much more likely the culprit (and the solution) lies in the correct application of the correct tax code – bring on real time reporting and suitable corrective action and this should resolve itself.

Please do submit your views for inclusion in our final response to HMRC – or indeed submit your own response to the document.

Tags: Central Deductions, HMRC, New System, PAYE
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