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RTI: When to report and when to pay

December 18, 2012


PAYE Real Time Information regulations require employers to notify PAYE to HMRC ‘on or before’ the point at which they pay their employees.

HMRC’s introduction of Real Time Information reporting aligns employer’s payroll process with their payments to staff. However, while the ‘on or before’ principle for reporting RTI remains central to the new RTI regulations that come into force from 6th April 3013 for all UK employers with less than 5,000 employees, software developers implementing HMRC’s RTI reporting stipulations have made clear that the payment channel used by the employer has a significant impact on the operation of the ‘on or before’ rule.

HMRC’s stated position is that the date of payment is deemed to be the settlement date, the date the employer ‘settles’ their liability to their employees to pay them. In practical terms this means the point at which the money becomes available to the employee.

The employer’s RTI return to HRMC, known as the Full Payment Submission or FPS, submitted from payroll software over the internet via the Government Gateway must be received by HMRC on or before the payment settlement date.

For example, for an employer paying employees by cheque, the settlement date is deemed to be the date the cheque is physically presented or posted to the employee. For employers using direct BACS, which operates a 3 day payment cycle, the settlement date is the payment date, day 3 of the BACS cycle, when funds are credited to employees’ bank accounts.

For employers using direct BACS, developers have pointed out that the practical significance of these RTI reporting rules is the FPS return needs to be submitted to HMRC before the employer’s submission of their payment instructions to BACS. This is because the BACS payment file is linked to the FPS return by a unique computer generated ‘hash’ code, which payroll software inserts into both FPS and BACS files. The ‘hash’ code in the BACS file, compulsory for employers using BACS, is essential to demonstrate compliance with RTI reporting obligations.

While this is consistent with HMRC’s ‘on or before’ rule, developers have pointed out that if employers using BACS were to wait until the BACS settlement day before submitting their FPS to HMRC, the delay would result in an unmatched payment record at HMRC, triggering HMRC employer compliance measures.

Mike Wilson, Managing Director of Evolved Software Studios Ltd, a software developer with clients in HMRC’s RTI pilot told

“If an employer makes the FPS return after the BACS return there is a reasonable chance the software will not have the BACS hash code that identifies each “BACS payment / FPS return entry” combination. This will result in an unmatched BACS payment record at HMRC and will result in the employer being flagged for compliance.
“The way in which HMRC’s system works would penalise employers who do not send the FPS prior to or at the same time as the BACS payment. This is because the workflow of the matching process is thus:

  • HMRC receive an FPS return.
  • The FPS return populates a database of incoming returns.
  • BACS (VocaLink) provide a regular (assumed daily) feed of BACS payment information to HMRC, who attempt to match these BACS payments against an already received FPS return using the BACS hash code which was generated at the time the payment instruction was created.
  • If a match is found, the payment is flagged as a match.
  • If there is no match, the payment is flagged as a non-match. HMRC will use this for compliance checks on employers.

“Clearly, other forms of payment (cash, cheque, online banking, standing order, etc.) are not covered by a hash and so are never matched.

Mike Wilson, further commented that:

“The most logical and practical time for employers to make their FPS submission is when they submit their payment instruction to BACS. After all, the BACS hash has been generated at this time and all of the information needed to make the return is available to the employer and payroll software and its within the permitted window for the FPS return. Leaving it later runs the risk that VocaLink will send the payment data to HMRC and – where the FPS hasn’t yet been returned (because the employer is waiting 2 out of the 3 days available before settlement date) – the payment will be mismatched. The employer will not know that this has occurred as the FPS return is a one-way feed to HMRC.

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