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BACS Role in RTI Data Validation Revealed

March 12, 2015


The role of BACS in the validation of employer RTI reporting has become clearer following information given to Parliament and reported by AccountingWEB. The use of the direct BACS or “RTI BACS” payment network has been a core feature of HMRC’s implementation of Real Time Information since before RTI began its pilot phase in April 2012. HMRC have not before provided any information about BACS’s role in PAYE data validation. While widely known that HMRC shares RTI earnings data with DWP, it has now been confirmed that an employer whose data is not validated by the BACS hash process is liable to challenge by employees claiming DWP welfare support.

HMRC requires commercial payroll software products link an employer’s RTI reporting, line by line, with their actual payments to their employees, where they pay by RTI BACS, using a BACS Service User Number. This process uses so called hash codes to allow HMRC to cross reference actual employer reporting with actual payments to employees, without breaching the confidentiality of employees’ identity or bank details. Where employers pay by RTI BACS, their payroll software inserts hash codes automatically into RTI returns to allow HMRC to validate the employer’s RTI data returns.

HMRC’s original technical guidance, dating from 2011, sets out how the unique and secure hash codes are generated by payroll software, but does not explain the hashes actual significance. The technical guidance to software developers, not employers, from HMRC says only that hashing is “A key feature of RTI” as “the hash provides HMRC with the facility to validate RTI data”.

No further references to the BACS hash process were made by HMRC until its Employer Bulletin (Issue 50) in October 2014 which referred to hashing, saying

“...the correct use of the ‘hash’ cross reference where this is relevant) improves benefit administration; making it easier for Universal Credit claimants and minimising contact between employees who claim Universal Credit and their employer”.

This statement in a section called ‘PAYE and Universal Credit’, indicated that not using the hash process correctly is liable to result in employees in UC contacting their employer but does not explain what would prompt such contact from employees about payroll matters.

HMRC mentioned BACS hashing again in the following HMRC Employer Bulletin (Issue 51) in December 2014 indicating that the use of the BACS hash was “best practice” for employers, but gave no explanation. As John Stokdyk, editor of AccountingWEB commented, HMRC’s reference to best practice was “oddly worded and ambiguous”, quoting ACCA head of tax Chas Roy-Chowdhury who explained the significance of HMRC’s statement, saying “They [HMRC] are recognising that they have data that’s not as clean as they need to work properly with universal credit”.

DWP Minister Mark Harper however confirmed in a parliamentary written answer on 26 February that employers that don’t use hashing have to deal with their employees Universal Credit queries, because DWP won’t be able to: DWP relies on HMRC’s BACS hash process to validate employer RTI earnings data “to corroborate their submissions against real payments”. This is because DWP cannot be certain RTI data not validated by BACS used to calculate a UC claim is correct, once the data’s reliability has been questioned as a result of a claimant’s query or challenge. DWP must refer the employee, or the employee’s partner, back to the employer on whose RTI data the Universal Credit calculation was based. This explanation from DWP of how it relies on HMRC’s RTI systems means that RTI data quality issues directly affect not only employers’ relations with HMRC, but also their relationship with their own employees.

Kate Upcraft, the leading payroll commentator provides a further explanation of how the HMRC / DWP RTI data validation process works, which was reported by AccountingWEB: “HMRC currently attaches a confidence level to earnings data passed to DWP. The scale ranges from 1 (hash and amount match) down to 5 (payment not confirmed). Confidence levels 1 and 2 are the only ones that can be attributed to BACS submissions supplied with a service user number [using the BACS hash process].”

HMRC in a statement reported by AccountingWEB said “Employers do not need to pay their employees by BACS, but where they do, our systems can automatically verify that the payment amount reported is the same as the payment received in the individual's bank account. There is no obligation for employers to pay by BACS if they don't already and HMRC is not advocating that employers should move to BACS for tax purposes.”

HMRC’s comments appear to refer to employers’ obligation to report RTI for “tax purposes” only and do not address the wider issue that PAYE data is also used by DWP in its assessment of Universal Credit and other welfare payments, an area of DWP responsibility.

Despite HMRC’s assurances it is now clear employers may have to explain their operation of payroll to employees in response to their queries and challenges over whether or not their Universal Credit awards are correct, where they do not pay employees by RTI BACS. HMRC’s implementation of RTI means employers can only report earnings data to HMRC/DWP that can be verified automatically if they pay employees via RTI BACS and make “correct use of the hash cross reference”.

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