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NAO report on RTI raises grave concerns

July 4, 2013

 

In a report published yesterday by the National Audit Office, concerns were raised over the resilience of HMRC’s PAYE RTI systems and the possible impact of HMRC's failure to stick to the project's budgeted cost. The report by the Comptroller and Auditor General, Amyas Morse, the NAO head, sets out HMRC’s performance in several key areas, including the stabilisation of PAYE and the implementation of PAYE RTI. It also addressed the tackling of VAT fraud and the reduction of tax credit error and fraud.

While the NAO acknowledged the reporting infrastructure worked well to allow employers to report RTI, it stressed that there were several fundamental issues which had the potential to threaten the operation of PAYE in real time.

HMRC’s 12 month RTI pilot did not have as large an uptake as they had anticipated; only 66,000 employers compared to the 250,000 expected by HMRC participated which meant certain functions of the system were never fully tested. The number of individual employment records (some 6.5 million) was kept in line with planned volumes by bringing larger employers into the pilot.

The pilot scheme only transferred starter and leaver data into HMRC’s NPS (National Insurance and PAYE Service) system, so that the ‘testing of the internal data interfaces between RTI and NPS system, enabling the performance of end-of-year reconciliations, only started from April 2013 after the live roll-out of RTI.’  The core function of PAYE RTI – recording who has paid what, in respect of which liabilities – was not tested in the pilot.

While the NAO report does not make any reference to the Carter principles, established by Lord Carter of Coles, which set out the technology change management rules HMRC has to abide by when implementing a major technology change project, the NAO report evidence appears to confirm that HMRC failed to follow the Carter rules. The Carter principle requires HMRC to test new systems - exactly as they will be deployed - for not less than 12 months before they are made live.

The report also refers to another systems issue, on which PayeRti.org has also reported: the creation of duplicate records and incorrect tax codes being issued by HMRC’s RTI systems. HMRC have recognised this issue, and had according to the NAO report identified approximately 10,000 cases of this by the middle of May. The report states that the problem ‘will continue as employers migrate on to RTI and HMRC is monitoring [it] daily,’ but gave no indication of how HMRC intends to fix the problem.

The RTI budget and cost overrun is identified by the NAO report as a risk factor in its own right.  The current expected spend on the project stands at £356.6 million, some £115.5 million over budget. But the report made clear that there was no extra money available within the expected spend to deal with any new systems issues which may arise.

The report also outlined a further major potential problem: HMRC has not put in place adequate contingency measures should RTI systems suffer a severe failure.  HMRC ‘chose not to develop full resilience’ as it would have been more expensive to make sure there were technical resilience and disaster recovery mechanisms to support RTI.  HMRC reasoned that they could in an emergency operate PAYE without RTI and were also confident that in the event of a major disruption to processing the RTI system could be recovered.  In response to urgent recommendations from the NAO in 2011-12, HMRC developed various short-term contingencies in order to meet the October 2013 delivery date, such as temporarily holding submissions in a queue until processing resumes, but there is no money available for developing further contingency mechanisms in the RTI budget.

With constraints on available funding and concern over the resilience and capabilities of HMRC’s systems, the report warns that the further roll-out of RTI may be at risk of encountering significant problems.  In particular, the ‘operational capacity of its systems and resources to manage take-on volumes over the April to October period’ are cited as areas of particular concern for the NAO. HMRC were quoted by the report as saying that PAYE could continue to operate if RTI reporting infrastructure were to fail because of systems issues, but no explanation was offered as to how this might operate in practice.

However, the most worrying issues highlighted by the report are those surrounding the lack of financial systems accreditation.  As part of its Change Programme, HMRC requires all new systems to have financial accreditation, which should ensure that systems are acceptable for accounting and financial control purposes.  RTI went live without receiving full financial accreditation, because HMRC was confident it could resolve any system problems before the critical deadline of October 2013, when Universal Credit is launched by the DWP.

The report states that: ‘A number of these system requirements were identified towards the end of the pilot and were not included in the original business case.  These issues do not impact an employer’s ability to submit data to HMRC using RTI but do result in weaknesses in HMRC’s ability to produce and report financial information about PAYE.’

These findings appear to indicate the PAYE data HMRC’s new RTI systems are collating on employers’ PAYE schemes may not be reliable, and without the means to access and use detailed information about employer PAYE liabilities HMRC is likely to experience significant challenges in reconciling PAYE accounts and the employee earnings data on which the employer’s liability is based. The NAO report goes on to say that ‘HMRC is currently undertaking work to understand the extent to which failure to address these accounting issues could result in HMRC being unable to correctly allocate and account for some PAYE payments received from employers or to identify and collect amounts outstanding.’ The possible impacts for employers who have a legal obligation to demonstrate the correct operation of PAYE are not mentioned.

This inability to produce reliable financial information on employers’ submissions and PAYE payment transactions threatens to undermine HMRC’s ability to resolve employer queries about their PAYE payments and liabilities and reconcile data discrepancies.

While the NAO report makes clear that HMRC’s lack of financial accreditation for its RTI systems has the potential to create problems, it does not say that such problems have already been identified. However, as PayeRti.org reported on Tuesday, Rebecca Benneyworth, head of ICAEW Tax Faculty, has commented that she has started to receive feedback from agents and employers about PAYE misalignments and apparent underpayments of PAYE arising because of how RTI is processed.

Weakness in the accounting element of RTI systems could have a severe and long-term impact on HMRC’s PAYE system and its customer service targets.  The NAO report said ‘[HMRC] continues to lag behind other service delivery organisations in the extent to which it places the needs of customers at the heart of decision-making. Achieving compliance with their tax obligations thus remains more difficult and costly than it should for many citizens and smaller businesses.’  A failure of RTI systems would be damaging to HMRC’s continuing efforts to improve their customer service as it would result in greatly increased pressure on their call centres and staff.

RTI underwrites the operation and delivery of the Government’s welfare reform programme and the introduction of Universal Credit by undertaking to deliver accurate claimant earnings data in real time to the Department for Work and Pensions. The RTI financial reporting and accounting issue, by raising the possibility that employer RTI data cannot be reconciled and managed accurately by HMRC, has the potential to threaten delays to the Department for Work and Pensions’ roll-out of Universal Credit. Without accurate and timely data regarding taxpayer and welfare claimants’ earnings it is not clear how DWP will calculate benefits and allowances eligibility.

The report acknowledged that HMRC had made some progress in the 2012-13 accounts period, particularly in its stabilisation of the PAYE system.  The introduction of the National Insurance and PAYE Service (NPS) system in 2009 caused significant problems in the reconciliation of PAYE, taking HMRC until October 2012 to clear the resulting backlog. The stabilisation involved the resolution of historic PAYE cases from as long ago as 2003, and some 6.7 million end-of-year reconciliation cases from 2008-9 and 2009-10 costing £78.9 million.

However, HMRC had to forgo an estimated £953 million in unpaid tax to make the workload of bringing PAYE up to date manageable, arising partly from cases where there was a temporary increase in the threshold for debt collection, but mostly where an estimated amount of tax was written off for reasons of value for money because HMRC judged it would not have been cost-effective to pursue the matter.

The report makes clear that it is HMRC’s own view that RTI should in time reduce the number of PAYE ‘work items’ which HMRC have to deal with, a reduction which HMRC’s management is confident will occur over the next two years.

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