UK: Get Ready for Payroll Changes
The U.K. government’s plans for employers to file “Real Time Information” (RTI) of tax and social security withheld from employees have become further clarified through the publication of several new documents regarding RTI. HMRC published summary responses to the second stage of consultation and provided details of some further changes to the original proposals on 30 September 2011.1 Further technical details for software developers were published on 3 October 20112 and on 7 October 2011 HMRC published a series of question and answers aimed at employers entitled “Employee Information – getting it right”3.
The proposal for employers to file RTI of tax and social security withheld from employees was announced in the U.K. government’s Budget on 22 June 2010.4 Broadly, RTI requires employers to provide details of remuneration and withholding when or before the remuneration is paid to the employee. It is to be mandatory for all employers with very limited exceptions from October 2013. This is a very significant change because the details have to be provided in respect of each employee. Currently the U.K. tax authority only receives the totals of tax and social security withheld from each employee after the end of the tax year.
Timetable to Implementation
Seventy-five percent (75%) of respondents who expressed a view on the timetable proposed by HMRC for the introduction of RTI thought it was unachievable.5 Software developers felt that the proposed timetable did not allow sufficient time to develop and test products to have them in place in time for April 2012. HMRC, therefore, has agreed a revised approach to the pilot which means that not all software products need to be RTI-enabled for April 2012. A pilot exercise will run for a period of 12 months from April 2012 and, subject to a successful pilot, HMRC will still start to mandate the use of RTI from April 2013, with all employers required to use RTI by October 2013.
The implementation of the new Universal Credit, which will replace a number of social benefits in the U.K. in October 2013, requires the information provided by RTI and, therefore, despite the concerns raised, the deadline for mandatory use of RTI by all employers remains fixed at October 2013. (For prior coverage, see the following issues of Flash International Executive Alert: 2011-064 (8 April 2011) and 2010-195 (7 December 2010).)
This implementation timetable is extremely tight and the concern of KPMG LLP (U.K.) is that employers are not ready for the changes. A survey of employers conducted by KPMG highlighted that 54 percent of respondents had not considered the impact of RTI. KPMG welcomes HMRC’s efforts to highlight the changes and the publication of this series of questions and answers.6 It appears that more publicity would be helpful if employers are going to be ready on time.
Alignment of Records
As part of the process of joining RTI, HMRC will align the records of employees that they hold with the records held by employers. More information about this ‘employer alignment’ process will be published soon. When joining RTI, employers will have to provide HMRC with details of all employers on their payrolls. HMRC recommends that employers start to prepare for RTI by checking the information they maintain.
It is not surprising that HMRC has suggested employers prepare for RTI given that in the 2010/2011 tax year over 500 employer returns showed they employed an individual named: A. N. Other.7 Additionally,
• 128 staff entered as Mr., Ms., or Mrs. “Dummy”;
• 572 people whose surnames only included the letter X, ranging from Mr. X to Mrs. XXXXXX;
• 75 staff with the surname “Casual,” 11 “Cleaners,” 9 “Workers,” and 6 “Students”;
• 824 employees with the surname “Unknown”; and
• 40 people were apparently 200 years old or more after incorrect dates of birth were submitted.
HMRC has started e-mailing employers requesting that they look at and cleanse their data ready for RTI.
HMRC states that “Over 80 percent of matching problems experienced by HMRC are caused by incorrect information about an individual’s name, date of birth or National Insurance number.”8 HMRC is stressing, therefore, that employers check the quality of the data required.
HMRC recommends that employers should make sure they hold “full” names: first name, middle name, and surname. However, it is expected that RTI will only require first name, middle initial, and surname. Dates of birth should be provided in the format ‘day/month/year’.
HMRC says that it gets incorrect National Insurance numbers every year. The number must begin with two letters, followed by six numbers, and end with letter A, B, C, or D. Employers can ask HMRC to trace an employee’s National Insurance number by completing form CA6855, which can be found at: http://www.hmrc.gov.uk/forms/ca6855.pdf .
If under a social security agreement with their home country, assignees to the U.K. are not liable to National Insurance Contributions, they are not required to apply for a National Insurance Number. Currently, such individuals who are required to file self-assessment tax returns are allocated a Unique Taxpayer Reference number and a “false” National Insurance number which should not be used for the purposes of RTI.
As part of RTI, HMRC is introducing a new National Insurance Number verification service which employers will be able to use to foster the use of only valid National Insurance numbers.
Details of employees’ addresses will be submitted as part of RTI; but any changes in address will not update the records for a particular employee. The employee will remain responsible for notifying HMRC of the change of address.
Collecting Real Time Information – The Electronic Channel
Under RTI, employers will provide HMRC with details of the amount of tax, social security, and other amounts relating to each employee’s pay when, or before, they make the salary or wage payment to the employee. The original proposition was to use BACS (the bank system used to pay the majority of employees in the U.K.) to send the data to HMRC. An alternative Internet channel is being provided for those employers who do not use the BACS system.
Due to concerns about the tight timetable as a transitional measure, an existing Electronic Data Interchange (EDI) channel will be developed to deal with RTI data until at least April 2014.9 Therefore, from April 2012, the two RTI channels will be EDI and the Internet channel through the government gateway. Further details on the longer-term strategic channel (BACS) are to be published by HMRC in due course.
Changes to Data Required
HMRC has made amendments to the data to be submitted under RTI. Specifically, “hours worked,” “passport numbers,” and “holiday pay.”
The majority of employers responded that they did not accurately record the number of hours worked per pay period for various reasons including hours worked not being recorded for individuals on standard contracts. As a result, employers will now be required to report the number of normal weekly hours worked within specific banding: “up to 15.99 hours,” “16 to 29.99 hours,” “30 hours or more,” or “Other,” which will be used when these categories don’t apply, e.g., pension payments.
Passport numbers will only need to be provided where they are collected as part of a pre-employment check for a new employee who does not provide a National Insurance number when asked.
Holiday pay is no longer a required data item. Employers will instead be asked to provide information on the number of pay periods covered by the payment instead.
Further updates for software developers were published on 3 October, and can be found at http://www.hmrc.gov.uk/softwaredevelopers/rti/changes-edi.htm .
Many employers may be thinking that their payroll software providers or payroll bureaux will deal with the changes enforced by the introduction of RTI. This, however, overlooks the fact that the data required may not be in the payroll software, but in separate HR systems. Employers that use a payroll bureau will have to provide more information to the bureau. Therefore, it is essential for employers to have processes in place to determine that the correct information is provided.
Certainly, as explained earlier, based on evidence published by HMRC, some employers will have difficulty providing the data.10
KPMG LLP in the U.K. is in ongoing discussions with HMRC on these proposals and will continue to keep clients informed of further developments.
1 See: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_031632 .2 See: http://www.hmrc.gov.uk/softwaredevelopers/rti/edi-rti.htm .