Making a Smooth RTI Transition

Many businesses are unaware of an imminent overhaul in how they give information to the taxman, one which some commentators are describing as the biggest change in PAYE since 1944.

Under a new mandatory system called Real Time Information (RTI), which comes into force in April, all employers will have to send HMRC details every month about what each employee is paid and how much tax has been deducted. Failure to comply may incur big penalties. The precise start date will come in the form of a letter from HMRC next month, but most businesses should expect to begin regular reporting in April.

The idea means that the taxman can keep a much closer track of how an individual company is managing its cash flow. The reform will stop the fraudulent practice of firms juggling their finances by “forgetting” to declare all their PAYE each month, only properly reporting at the end of the year.

This has led to businesses then often asking for time to pay the arrears. To the government, this matters even more now that HMRC has lost its status as preferential creditors in liquidation.

But what is good for HMRC is not necessarily good for companies, although it should help ensure that employees are paying the correct amounts. There are fears that many struggling ones will be tipped over the edge at a time when even strong ones are feeling the strain.

Under the new system, HMRC will know immediately when companies underpay PAYE and have knowledge of all employees throughout the year without waiting until the end of year returns. This also helps them to spread the administrative burden throughout the year.

RTI returns will be required for every payroll run, whether weekly or monthly, and filed electronically.

The returns will need to include details of all employees, with any not paid for whatever reason put on hold. On the plus side, the end of year Employer Annual Return forms P35 and P14 will no longer be required with forms P45 being replaced by an as yet unknown statement of up to date earnings of some some kind.

There will be no change to the method of calculating PAYE and national insurance deductions. Employees will still require an end of year P60 form certifying tax and national insurance paid. Also, P11D and P9D forms will still be required.

The key to making this potentially complex transition to RTI smooth is preparation. The very first thing to do is ensure that your payroll software is compliant. Commercial software suppliers are doing this, but anyone preparing manual payroll calculations or using their own software, must make sure they can report under RTI. It may state the obvious: But do ensure your employee data is complete and correct.

It is important to align your details to the HMRC records as a one-off exercise, particularly as HMRC are threatening penalties for those who do not. This means having the following employee information: full name (not second names or abbreviations), date of birth, national insurance number, gender and address to “align”. It is obviously important to get precise details of anyone joining.

There are already signs that HMRC is starting to be less tolerant of firms building up tax debt, with an increasing number of firms are being denied under the Time to Pay scheme which has allowed for deferred payments since the economic slowdown.

Real time information fits into this context. It is coming, in real time, so check software and employee rosters or face unwelcome scrutiny from HMRC. For wobbly companies juggling tax debt to survive, a moment of truth about their chances is about to arrive.

Mike Parkinson is a partner in London accountancy firm Barnes Roffe
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