It’s still alive!

KEY POINTS

• Consultation has closed, but is it too late to stop?
• Do taxpayers understand coding notices?
• Will the new system really save work?
• Will it still be difficult to contact HMRC?
• Lobby your MP.

I thought the proposals to revamp PAYE had died a death, but reading past issues of Taxation I saw that a second stage consultation had been issued by HMRC in December last year.

So, I took the trouble to go back and pick out the articles that dealt with the issue. Three caught my eye:

• Bosses say no to PAYE calculator plan.
• PAYE reform plan 'raises many issues'.
• PAYE changes being rushed, warn pro bodies.

The overriding message from business and the accountancy profession is that they have ‘serious reservations’.

Serious reservations? Why isn’t everyone just saying a resounding ‘No way!’

Is it because we think HMRC will do what they want to do anyway, and all we can do is put pressure on them to tweak the plan so that it is at least workable?

I hope it is not that we think the proposed system is better than the current one. HMRC work for ministers and their senior civil servants; if enough people make a fuss, it will not happen.

The current PAYE system has worked fairly well since 1944. There must be a very good reason to change something that has served us so well for 67 years and may merely need updating to make use of modern technology.

Arguments against

Why I am so against the PAYE revamp?

First, I recommend reading the second consultation document, never mind that the date for responding has passed and that HMRC are planning a trial. It is not HMRC that we need to persuade.

For your convenience I summarise it here, but this is just my take on it so please read it for yourselves. I have not been able to avoid commenting as I go through.

The proposed new PAYE players are ‘real time information’ (RTI) and ‘centralised deductions’ (CD). The consultation document says:

‘RTI will collect information about tax and other deductions automatically each time employers run their payroll. This information will be submitted automatically to HMRC at the same time the employees are paid. CD will move the responsibility for calculating and deducting tax, National Insurance contributions (NIC) and student loan repayments away from employers to the electronic payment system.

‘Ministers have decided to proceed with a phased introduction of RTI beginning in 2012 [my italics]. All employers are expected to be part of the new system by October 2013.

‘RTI is needed for the Department of Work and Pensions’ plans for the introduction of universal credits from 2013. It will be used to award and adjust universal credit to take account of employment and pension income.

‘RTI will involve employers changing their current payroll processes and they will be expected to move over to paying PAYE/NIC electronically.

‘Approximately 8.6 million telephone calls are received each year relating to PAYE. Most of these are from customers seeking help in completing forms, ascertaining whether tax codes are correct or asking about a repayment of tax. Many of these calls relate to sporadic or multiple employments or come from pensioners, who can find it difficult to understand the tax on their pensions.’

I don’t see how this will change. If people are having trouble understanding now, then this will not change with just a change in the method of reporting information.

As an example, take a notice of coding concerning someone who is receiving an armed forces pension of £10,000 and is also working, earning £35,000. I have reproduced the exact wording (including capital letters or the absence of them) in the Forces pension code.

Accompanying notes

The notes accompanying the code start by explaining ‘tax free amount’ or personal allowance, then go on to say:

‘We have to see if anything should reduce your tax free amount.

‘Where you have more than one employment or pension, the way the tax tables that employers use work means that too little tax can sometimes be deducted if some of your income is taxable at higher rates. Without this adjustment you would pay too little tax so that at the end of the year you would owe tax. Please phone us if you would like to talk this through.

‘Savings income – that is interest from banks or building societies etc or company dividends – is usually taxed before it is paid to you (tax at 20% is deducted on interest and 10% on dividends). As you will be paying some of your tax at 40%, extra tax will be due on your savings income. Making this adjustment to your tax free amount collects the extra income. You can make this payment directly if you prefer, if so please contact us.

‘If your pension is more than £5,225 you will pay tax as follows:

• at 20% on the first £35,000;
• at 40% on income between £35,001 and £15,000;
• at 50% on anything over £150,000.’

The adjustments are not given note numbers so the taxpayer cannot easily link the notes to the adjustment they relate to and none of the notes explain why deductions of £1,794 and £156 specifically have been made to the personal allowance, or what extra tax they will collect.

Give this scenario to any layperson you know and ask him or her if they fully understand the notice of coding. I would be surprised if you find someone who does.

Customer contact

The consultation document continues:

‘HMRC believes that RTI will help to reduce circumstances which cause customer contact because more people will be taxed correctly in-year. It will also be easier to answer the questions that arise as HMRC staff will have access to in-year information about the individual’s income and so will be able to provide a better and quicker service.’

But people will still not understand notices of coding after RTI/CD even if they are correct and my bet is they will still be unable to get through to HMRC then as now. The consultation then says:

‘RTI will get information on those joining and leaving employment to HMRC more quickly. For example, RTI will enable the date of leaving to be submitted before the final earnings information.’

This may enable HMRC to make any changes to coding they feel are due just before the employee leaves and if these are wrong leave a new employer to sort it out with a potentially negative affect on relations between the employee and new employer from the outset of the new employment.

On past form, errors of all sorts will be made and, as now, no matter how much information HMRC have, people will not be able to get through to HMRC to sort them out. In addition, payment will be tightened up:

‘Real time information will mean that HMRC can check that an employer is paying the correct amount at the time of payment rather than having to wait until after the end of the year as now. This will enable HMRC to take prompt debt collection action.’

So the new system will enable HMRC to chase employers quicker for late paid PAYE. I thought that was why penalties had been brought in: to encourage prompt payment. And which available staff do HMRC have to take advantage of this better information flow?

We all know the grief that will result if the debt collecting work is passed to private contractors who do not understand the PAYE system and will not be interested in any mistakes that may have been made.

Pay control

Then with regard to the second stage of the new PAYE process, centralised deductions, the document says:

‘HMRC will set the deduction rules as they do now, but instead of each employer applying these, they would be applied automatically as part of the payment process system. The information about the employee’s gross pay would be sent by the employer to the electronic payments system. The money would, at all times, stay within the electronic banking system and would not be transferred to HMRC. On the date of settlement the net payment would move from the employer’s account to the employees’ accounts and on the due date the deductions made would go to HMRC.’

Therefore, effectively, HMRC will control employees’ net pay and employers will merely pay what they are told to pay even if they know it to be wrong, and on the date HMRC say.

Also they can hold up overpayments of PAYE brought about by code changes until HMRC are satisfied they are properly due, perhaps in case for example HMRC can find underpayments from earlier years which have not yet been dealt with.

I am not even going to get into what will happen when an employer has made the wrong payment of pay for a month and then has to try to correct it through the new RTI/CD system.

Those are the bare bones of the proposals. And all this for what: some savings because employers will no longer have to submit end of year returns (form P35)?

I am not persuaded by the statement that employee starting forms (P46) and employee leaving forms (P45) will no longer need to be done when much of the same information will still be required; it will just be entered into the computer for the new system.

Many P46 and P45 forms are being submitted online now in any case.

The employer will still be required to issue payslips to their employees, and issue P60s to their employees at the end of the tax year.

They will also still be required to issue a ‘final’ tax/pay statement showing tax paid to date, and taxable pay to date to a leaving employee unless the payslip shows this information.

At the end of the year the employer would still need to issue a P9D or P11D for relevant employees.

I do not see this as a significant reduction in the current administrative burden on employers.

Code corrections

One big advantage the consultation document stresses is that HMRC will be able to correct wrong PAYE codes in year, but incorrect codes can be corrected in year now if only taxpayers could get through to HMRC to tell them of any changes (and I have some suggestions about this; see below).

There is a very important principle involved here. There has always been a dividing line between government and business with government legislating and the employers implementing; now, government will cross the line and control people’s wages and salaries directly.

This would be a very bad move and the beginning of a slide that could see government taking tax or other payments directly out of the bank accounts of companies and employees.

No tax authority can be trusted with such responsibility as is envisaged by RTI and then CD and then who knows what, no matter how efficient. And our tax authority has not been very efficient.

Where tax and National Insurance deductions are doubted, businesses and individuals should always be able to make representations and have the choice to make the tax payments that they feel are right until they can check matters with HMRC.

This puts the onus on HMRC to devote sufficient resources to dealing with these representations and enquiries.

If the tax authority is running the show and controlling what tax payments are made, there is no inducement for it to provide sufficient numbers of properly trained staff to deal with problems. They can take the view that it will get sorted out when they can get round to it.

Government should remember that if it interferes with the earnings of its hard-working citizens so that people are at risk of getting less pay than they expected – for a whole host of reasons, such as the clawback of one thing or another – or, the ultimate sin, so that they receive no pay at all; and if those people are not then able to get an instant response from the relevant tax authority as to why, this is playing with fire.

In my experience, one of the most emotive subjects – and certainly up there in the ‘top ten’ with such things as how the national sporting teams are doing, the price of petrol, the weather and what Kate Middleton is wearing – is the amount of pay people receive at the end of the week or month. It would be a very brave government indeed that trusted its tax authority to get this right.

Recommendations

CD will follow RTI as sure as night follows day unless something is done to stop it all. We should remember that the current problems with PAYE have come about because HMRC’s checking processes have been found wanting.

But HMRC have been working on this with their new, and I am sure very expensive, National Insurance and PAYE system (NPS).

There is a lot that can be done without changing the whole system that has worked fairly well for so long and a lot more cheaply.

First, notices of coding could be redesigned to be intelligible and could show all sources of income for the year and how HMRC have calculated them, total personal allowances, how the allowances have been allocated and the source of income that particular code is being applied against.

They can carry a prominent note that if the taxpayer does not understand the notice he should contact HMRC.

Furthermore, HMRC should be easily contactable: i.e. by telephone, without waiting for 20 or more minutes before an HMRC member of staff answers; by letter, without waiting for three months for a reply; and via the internet.

Also, why should HMRC not add a page to their website where a taxpayer can answer a few simple questions about his employment/pension income and send this to HMRC for them to act on it?

Why shouldn’t HMRC send a message inviting the taxpayer to ring them if HMRC don’t understand the information, which I would expect to be a limited number of cases if the website page is clear and asks the right questions?

Alternatively, why should HMRC not ring the taxpayer if it is impossible for the taxpayer to get through on the phone to HMRC?

Why does a failure in HMRC systems need to result in turning the PAYE system on its head and giving control of people’s income to the state, if not immediately then only a small step away.

For tax credits too, notices could be intelligible and explain clearly how the tax credits have been calculated – i.e. on what level of income – and carry a clear notice that if this is not correct, claimants should contact HMRC preferably by phone (and not an 0845 number that claimants cannot afford from the only phone they often have: i.e. their mobile phone) or internet as above to provide correct information and that if they don’t, they run the risk of having overpaid tax credits reclaimed from them later or losing out because they are being underpaid tax credits and any underclaimed amounts may not be able to be paid retrospectively.

And while we are on the subject of contacting HMRC, could they appear somewhere sensible in the phone book please and save accountants rerouting calls that are for the Tax Office?

These suggestions will cost very little.

Furthermore, at time when cuts in public expenditure are being made everywhere and a new PAYE computer system has been paid for, this does not seem the time to introduce another new expensive system, even if HMRC could operate it effectively, which – I am sorry to say – everyone I speak to severely doubts.

HMRC need to greatly improve their telephone service and written explanations before they make any fundamental changes.

If introduction of the new PAYE system was dependent on them doing that first, RTI/CD might well never happen.

But however much HMRC manage to improve in these areas, and they certainly need to, RTI/CD is simply a step too far and we just do not trust HMRC to operate them effectively for PAYE taxpayers.

Conclusion

So what should you do if you are against the new changes?

The answer is the same as I always say about such important issues: write to your MP and encourage anyone you meet to write to their MP. If you do that, you have a good chance of stopping it. If you don’t you will be part of a major unworkable step

towards the state taking control of the net income of more than 20 million people on PAYE. And when your children ask you in the future as mine do about past events on subjects they expect you to have been involved with – ‘did you know about that?’ and ‘what did you do?’, you will not have to mumble an apology about being too busy earning a living, but can hold your head up and say ‘yes’ and ‘we did all we could to stop it’ and ‘we did stop it’.

Issue Extract

improvingtheoperationofpaye.pdf

Issue: 4300 / Categories: Comment & Analysis , PAYE revamp , Employees , Income Tax