What is PAYE RTI?
The introduction of PAYE RTI represents a fundamental reform of Pay As You Earn, requiring all UK employers to notify HMRC of their liability to PAYE at the time or before they make payment to their employees. Payroll software will collect the necessary information and send it to HMRC via the Government Gateway. It represents the largest change to PAYE since its introduction in 1944, where previously employers paid PAYE due to HMRC on account but only declared and reported their PAYE at the year end, with a P35 return.
From April 2013 all employers will be mandated by law into PAYE RTI requiring them to submit their RTI return every time employees are paid as part of payroll arrangements. Pension providers are affected as well as employers.
There will be no parallel operation of old and new PAYE regimes – once in PAYE RTI an employer will continue in PAYE RTI.
HMRC intends to mandate small and medium employers into PAYE RTI in April 2013 and is prioritising these businesses so that the overwhelming majority of UK employers will be mandated into RTI in April 2013 at the start of the tax year. Larger employers will follow so that all UK employers and pension providers will be in PAYE RTI by October 2013.
The dates on which payment of tax and National Insurance deductions are made to HMRC remain the same, either the 19th or 22nd of the month or quarter following the reporting period.
The Government’s commitment to the introduction of Universal Credit in October 2013 requires PAYE RTI to support this reform of welfare. PAYE RTI provides employee earnings data to HMRC to allow the Department for Work and Pensions to assess Universal Credit claims with timely and accurate earnings data for employees. RTI directly supports welfare reform and the introduction of Universal Credit has dictated the timescale for HMRC’s introduction of PAYE RTI.
- All UK employers (and pension providers) are affected
- Payroll software automatically submits statutory PAYE returns to HMRC
- Requires RTI compliant payroll software or use of HMRC's Basic PAYE Tools
- Exposure to Government Gateway and government IT infrastructure
- Penalties apply for failure to submit returns
- Penalties issued automatically for ‘late’ submission via Government Gateway
- RTI "a one way street" - no parallel operation
- Most (smaller) employers mandated into RTI, April 2013
- RTI returns need to reconcile with employee payments
- BACS users submit an additional file via BACS
Long Term Strategic Channel Choice - BACS
HMRC have previously made clear a preference for BACS in the longer term as the strategic channel for employers to submit their RTI returns at the same time as they make payment to their employees, because BACS terminates 92% of the working population’s salary credits. HMRC’s original preference for BACS arose on the grounds that it offers the most reliable and lowest cost platform for managing the significant volume of data RTI will generate. This would mean the proven national banking payment system rather than government IT infrastructure is used for reporting PAYE RTI.
The significance of the future BACS strategic RTI reporting channel is that employers can submit their payment instructions and RTI return to HMRC simultaneously in a single (BACS) file submission: The return is validated by the payment to employees and the payment reconciles to the return, significantly reducing the risk of fraud.
In the context of RTI, BACS or 'direct BACS' means that employers initiate payments to their employees through the BACS network by using a BACS Service User Number (or 'SUN') which is different from making payments by internet or telephone banking or otherwise instructing the bank to make payments: Direct BACS receipts both the instruction to pay as well as the payment, where all other payment methods only use the BACS network to credit the recipient's bank account.
HMRC’s ‘Interim Solution’
HMRC decided in July 2011, after representations from payroll software providers, to introduce an Interim Solution in advance of a final decision on the strategic RTI solution.
Under the Interim Solution, employers submit their RTI return for each pay cycle directly from RTI ready payroll software over the internet via the Government Gateway, without having to use BACS, and HMRC started to pilot this Interim Solution in April 2012.
For employers using BACS, RTI payroll software also generates the employer’s BACS payment file. This BACS payment file is linked to the employer’s internet RTI return, submitted to HMRC from the same software, via a unique reference. This reference, known as the ‘hash code’, is present in both outputs: the internet RTI return and BACS payment file, allowing HMRC to reconcile these two separate – but corresponding – outputs received respectively from the Government Gateway and the BACS network.
The Interim Solution therefore has two reporting options for the Employer: An employer themselves, or their accountant or payroll service provider, can comply with their RTI obligations by submitting an internet RTI return only over the Government Gateway, which is mandatory, or for those using BACS, by making an additional BACS submission in addition to the mandatory Internet Return.
HMRC does not currently require employers to use BACS, and employers are under no obligation to do so, although BACS does offer the employer a way of demonstrating their efforts to comply with their RTI reporting obligations, by proving their submission of a BACS payment file with its hash reference.
In advance of the completion of the Interim Solution pilot HMRC has indicated the Interim internet channel, with employers making RTI returns over the internet, is HMRC's preferred solution which it plans to retain long term.
Major employers, who use a direct EDI interface with HMRC, had previously been advised by HMRC the EDI channel would close in 2014, to realise the savings promised by a single strategic BACS channel. HMRC has now committed to support the EDI interface until 2016-17.
HMRC have been consulting on penalties for RTI reporting and will confirm the penalty regime in advance of April 2013. HMRC have already confirmed that penalties will apply for the failure to report RTI returns on time when payroll is run and that these penalty notices will be issued automatically, directly to employers.
Automated RTI penalties may result in RTI penalty notices being issued to employers who consider they have complied with their reporting obligation – for example in the event that the Government Gateway or HMRC systems cannot reconcile employer submissions to their PAYE record in time each month.
Indicative penalties for the failure to report RTI on time set out by HMRC are £100 for each instance of late reporting, for example an employer operating a monthly pay cycle is required to report RTI monthly, but penalty amounts and rules are subject to confirmation.
RTI penalties make it important that employers can demonstrate their efforts to comply with their RTI reporting obligations and they have robust systems in place to support PAYE RTI compliance.
HMRC propose that penalties for inaccurate returns will be determined manually according to its own compliance checks.
There are a number of important preparatory steps employers need to take in good time before April 2013.
PAYE RTI requires complete accuracy of employee data including, name records, dates of birth, National Insurance Numbers and it is important this data has been checked and verified.
Employers should take steps to validate the accuracy of their payroll records well in advance of their being mandated into RTI. Part of the PAYE RTI joining process for larger employers requires them to align their payroll data with HMRC's records to ensure they reconcile.
All UK payroll software has effectively had to become PAYE RTI compliant. Employers or their payroll providers with a software maintenance contract can expect their software to be upgraded but should liaise with their software supplier to ensure this is done well in advance.
PAYE RTI software allows employers or their agents to submit RTI returns directly over the Government Gateway via an internet connection. At the very least, compliance with the Interim Solution for RTI requires employers payroll is processed on a PAYE RTI version of their payroll software.
Employers should review their current payroll procedures and liaise with their payroll service providers or payroll software suppliers and assess their preparedness for PAYE RTI and their ability to demonstrate their compliance with their reporting obligations. Employers should be aware of the importance of ensuring that if not using BACS to pay employees the sums paid to employees, for example via internet banking, must under RTI always reconcile with their mandatory RTI internet return to HMRC.
PayeRti.org’s recommendation to employers is to take the necessary steps now to make sure they are ready for RTI and have the systems in place to demonstrate their efforts to comply with their RTI obligations and ensure these efforts are adequately recorded and can be verified.
HMRC is confident it can deliver the internet reporting infrastructure of the RTI Interim Solution to support the simultaneous move of the overwhelming majority of UK employers into RTI in April 2013, from the start of the tax year.
It must be acknowledged that the scale of submissions and volume of data over the Government Gateway the Interim Solution relies on will greatly exceed anything it has previously managed. The biggest exposure for employers and their payroll providers is the internet submission of each employer’s RTI return, because issues with the Government Gateway risk the technical breach of an employer’s reporting obligations and the automatic issue of a penalty notice direct to the employer.
HMRC recognises that the costs of PAYE fall disproportionately on small business and PAYE RTI will continue this trend.
The UK accounting profession has voiced its concerns about the timescales and design of HMRC’s solution for PAYE RTI, and will continue to speak for the interests of UK businesses on this subject.
|2012 April||310 volunteer employers begin HMRC pilot|
|2012 July||1,300 additional volunteer employers join pilot|
|2012 November||Up to 250,000 further volunteer employers enter PAYE RTI|
|2013 April||PAYE RTI mandated for most employers|
|2013 October||All employers now in PAYE RTI - Universal Credit introduced|