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HMRC revises savings estimates of RTI

December 18, 2014

In an updated Tax Information and Impact Note HMRC have adjusted the costs and savings they originally forecast for both the Exchequer and employers arising from RTI.  As reported by PayeRti.org in November, the publication of this TIIN was postponed after stakeholders raised concerns about the way that administrative savings due to RTI had been calculated. 

Savings to the Exchequer have been revised significantly downwards in the updated figures, with estimates for the year 2014-15 down to £170 million from £355 million, and projected savings for 2015-16 reduced to £235m instead of £330m. These savings are generated from the use of more accurate data to reduce overpayments of tax credits as well as reductions in fraud and error.  The TIIN does not contain any explanation as to why the savings to the Exchequer, published in the Autumn Statement, have been revised downwards.

HMRC anticipated that the removal of the PAYE end of year forms P14 and P38, along with the simplification of processes around starters and leavers, would be key drivers of administrative savings to employers.  However, part of the P45 process has been retained in the live roll out of RTI, meaning that the saving to businesses of £300 million has been revised down by £7.5 million in the updated estimates.  HMRC acknowledges that the savings generated in these areas will be counterbalanced by the extra administrative burden caused by the requirement to collect and report data every time an employee is paid, especially because this data is required to be more detailed and accurate than before.

The admin cost burden of RTI to employers once in a steady state was originally estimated to be £30m a year, and this figure is repeated in the updated TIIN.  This is broken down into the following categories: the payroll hash code (linking RTI submissions and payments made to employees) £4m; additional data £10m; higher quality/more data to be input for new joiners £2m; the closure of the Simplified PAYE Deduction Scheme (SPDS) £750,000; and costs associated with data submission (for monthly/weekly RTI submissions) £12m.

An HMRC spokesman quoted in Payroll World said that although “the short-term costs to business of implementing RTI have risen [for 2013-14], these are matched in the first year and are then substantially outweighed by annual savings to business of £292.5 million.”  The spokesman said that HMRC had always accepted that software and agent costs would impact on the actual savings, and that they would need to be revised once more data was available after the pilot had ended.  In the TIIN HMRC estimates that these steady-state savings should be achieved in 2015-16.

However, the Admin Burdens Advisory Board have stated that they are still concerned by the methodology used to calculate the benefits to employers, as published in the TIIN, and registered their surprise that the estimates were similar to those presented previously.  In a letter to Financial Secretary to the Treasury David Gauke, Theresa Graham (Chair of the ABAB) welcomed the positivity and openness of HMRC’s engagement with the ABAB and said that they were pleased to have been able to help HMRC identify key issues.  Graham said that engagement with HMRC had helped to create a “much clearer picture” of the cost of implementing RTI and said that they “consider the revised figure (£292 million over a period of years) to be a much more realistic statement of these transitional costs.”

Despite this improvement Graham said that the ABAB remains concerned by the use of HMRC’s Standard Cost Model, as they believe that in the instance of RTI there is “a marked difference between the savings that the model identifies (based on its own logic) and the reality of savings experienced on the ground.”  In the experience of the ABAB, the distortion between expected savings and reality has been “particularly acute for those small businesses moving to on or before reporting (from an annual basis), and for those employers already benefitting from payroll software.”  Graham says that in the future a more rounded approach to estimating benefits from such changes should be considered, and that in the view of the ABAB “the actual experience of savings of time/effort/cost amongst employers, agents and payroll bureau is nowhere near as great as the model says.”

The updated TIIN also presages changes to the end of year RTI process.  In the updated cost figures for 2013-14, the note says that costs for the “final tax/NICs return of the year, including the employer End of Year Checklist and declaration, due to be removed from 2015 and until then the cost is estimated at £35m (on average £22 per scheme)”.  Commenting on this in her blog, payroll expert and chair of the RTI stakeholder taskforce Kate Upcraft welcomed the decision to remove these questions (which were originally included in form P35 which had to be completed at the end of the tax year) from the final EPS or FPS return as “the answers to them were very rarely used as part of compliance and were an unnecessary burden, particularly for agents, in collecting the answers from clients by 19th April (a month earlier than the pre-RTI deadline of 19th May).”

The late announcement of this change, which will take effect from March 2015, leaves very little time for the software developer community to accommodate this change in their products, and indeed HMRC’s own Basic PAYE Tools will not be updated to reflect the change until July 2015.  HMRC’s guidance to developers indicates that final returns for the tax year 2014-15 will be accepted with or without the final declaration questions completed, to take account of the fact that developers may not have had time to incorporate the change into their packages.

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