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Tax codes issued under RTI may be incorrect

May 24, 2013

 

Incorrect PAYE tax codes are being issued by HMRC RTI systems for employers that appear to be reporting RTI correctly. The new tax codes which have been issued for some employees fail to take into account taxable benefits and are therefore incorrect. The problem affects employers who have submitted RTI Employer Alignment Submissions (EAS) or Full Payment Submissions (FPS) that are incomplete or partial.

The problem has been caused by HMRC not having a complete record of all employees in a PAYE scheme.  This can arise in a number of ways but all stem from employer submissions being ‘incomplete’ with respect to details of employees. The issue centres on the way HMRC systems read Employer Alignment Submission and Full Payment Submission reports initially submitted to HMRC which carry all the details of employees in a given payroll.

In such circumstances, once HMRC completes alignment of its records, any employees registered as live in its systems but not included in employers’ submissions will be designated as leavers and assigned a leaving date of 5 April.  If the employee who is treated as having ‘left’ is then included in a subsequent submission, HMRC systems recognises them as a new starter and may issue a new tax code. However the new tax code does not include taxable benefits and so will not accurately reflect the employee’s circumstances.

HMRC has identified situations where these errors can occur, for example, where an employer omits some employees from its EAS and subsequently includes the remainder on a later FPS.

A problem may also arise where the employee receives a taxable benefit and their employer sends its EAS in parts, without indicating on its first EAS that it is the first part of a subsequent submission. Without such a notification from the employer, HMRC will treat the first part of the EAS as a full alignment submission.

An HMRC spokesperson commented: "When the employer then sends a subsequent RTI submission (FPS) containing information relating to the missed employees, a new employment is created and a tax code issued. However, the new employment record will not contain the benefits information from the ceased record as the system believes it to be a new employment rather than an on-going one."

HMRC’s updated guidance to employers on its website advises employers who have encountered this problem to ignore the new codes and continue using the old tax code for that employee and to contact HMRC by telephone in order to have the benefits reinstated to the employee’s record and the tax code corrected. 

However, Linda Pullan, Head of Payroll Alliance, was reported by Pay & Benefits Magazine as saying it is clear that the problem is already far more widespread than HMRC’s comments appear to indicate. “This is just the tip of the iceberg.” “There is a wider problem as we have had reports from employers who have been issued with a large number of tax code changes with benefits being omitted and multiple amendments for the same employees.”

She concluded this could not just be the result of employers missing employees off an EAS.

The emergence of this issue, which arises from the need to synchronise employee records between employers and HMRC, indicates that the scale of the challenge for HMRC, to ensure and maintain the accuracy of employee data, may be greater than was first anticipated by HMRC and employers alike.

Chas Roy-Chowdhury, Head of Taxation at the Association of Chartered Certified Accountants commented, “If this problem is widespread, which we have reason to believe it is, it is a major warning sign for businesses.” “With the arrival of Universal Credit looming large on the horizon the RTI system faltering like this does not bode well.”

Mr Roy-Chowdhury’s comments indicate how the problems experienced by employers with RTI could, from October 2013, feed into the new benefits system when Universal Credit launches.

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