I will seek to keep my comments as brief as possible. Some serious and genuine concerns have been raised about the clause, which deals with the transfer to a real-time information system for PAYE. It will authorise additional regulations that will require employers to provide HMRC with full details of all tax, national insurance and other deductions from income at the time of payment.
Real-time information will be the biggest change to PAYE since it started in 1944. It will replace the obligation on employers to submit a single year-end return with a requirement to report to HMRC, normally on or before the making of a relevant payment to an employee, details of pay, tax, national insurance contributions, student loan deductions and other data in respect of each payment. The report will be known as a full payment summary.
For many employers, the increase in reporting burdens could be considerable. For example, employers with weekly paid employees will now have to submit returns to HMRC up to 53 times a year, rather than once. For employees paid daily, up to 366 returns a year will be required. The new regime will clearly be a huge responsibility for businesses, and there is some concern that HMRC may have underestimated how much it will cost them. Will the Minister tell us how he calculated the cost to businesses of the RTI system? Has he considered their case when drawing up the regulations?
The time frame within which businesses will be required to comply is tight. It will be impractical to meet for those who do not use computers in their businesses, who do not have broadband access or who pay workers before the payroll is computerised, as is common in the hospitality and harvesting sectors, where workers are paid at the end of their shift on the basis of hours worked or amount picked. It will create additional expense for those who do not currently use payroll software or have broadband access, or who need to use third parties to compute payroll and submit the necessary FPS.
While we welcome the extension of the deadline for notional payments to potentially 14 days after the end of the tax month, it is only a partial solution to the problems that employers might face. It is insufficient to cover all notional payments, because the deadline of the 19th of the month will create an unnecessary and potentially expensive burden for employers, owing to the need to run payrolls to collect tax on the notional payments outside the normal running schedule in cases where there is no actual payment to the employees from which to deduct the tax.
There will, in many cases, still not be sufficient time to obtain the information and input it into payroll or make an actual payment to an employee in time to meet the deadline. That is why HMRC has long operated easement, allowing NIC on marginal items paid late to be accounted for in the subsequent pay period. Even longer is needed for cross-border employment and for share-related payments, as they require the employer to obtain evaluations and work out how many shares to retain to cover the tax and NIC.
Frequently, the employer will not realise that a PAYE liability has arisen where the notional payment arises from exercising an option by an employee, especially if the employee is overseas and employed by a different company or branch. Does the Minister recognise that the requirement could be difficult for some businesses to meet? Has he considered alternatives or the possibility of a longer period? If businesses cannot or do not comply with the requirements, will they be issued with automatic penalties? There is no indication at this point of whether there will be a reasonable excuse provision with which to appeal against those penalties. Such an excuse exists for late personal tax returns, and it would be sensible if such provisions were to exist here as well. Why has there not been a clarification on whether such appeals would be possible? What is the Government’s intention?
I am sure that businesses will be grateful for information on that point. While RTI may have many benefits, we need to ensure that the system is workable. I hope the Minister will respond to the points that I have raised about the difficulties that the clause as currently drafted could pose.
Clause 223 makes changes to provide HMRC with additional powers to make regulations as part of the implementation of the PAYE real-time information programme—RTI. The powers allow HMRC to require banks and other businesses involved in processing payments through the bankers automated clearing service to provide HMRC with data to corroborate information from employers on payments made to employees and the tax deducted. The data will allow us to cross-reference tax information with the net value of the payments that employers actually make to their employees. This is a significant new PAYE compliance tool for HMRC.
Let me provide hon. Members with some background on the clause. PAYE has been operating in its current form for some 60 years—the hon. Lady is right to say 1944. RTI is being introduced from April 2012, when the pilot began, to bring PAYE into the 21st century by making it easier for employers, pension providers and HMRC to administer and, over time, more accurate for some individuals by improving the processes on joiners and leavers.
Under RTI, employers and pension providers will tell HMRC about the PAYE payments and deductions that they make, such as national insurance contributions, student loan repayments and so on, at the time they pay their employees, rather than at the end of the year, as happens now.
Instead of PAYE being a separate process for employers and pension providers, RTI will be integrated within the payroll process. Payroll software will collect the information and send it to HMRC electronically, with the smallest employers able to download HMRC’s free basic PAYE tools. Additionally, RTI will support the operation of universal credit, which is due to commence in October 2013.
The original idea, which was consulted on in spring last year, was to enable any employer that pays wages through the BACS payment system to make their PAYE tax returns through the same channel. HMRC announced on 13 May 2011, however, that, in response to concerns expressed by the payroll industry, banks and others about the timetable for RTI, the strategic implementation of RTI using the BACS channel would be deferred and a revised technical solution adopted for an interim period.
The interim solution enables HMRC to validate the information provided by employers via RTI. RTI submissions will be cross-referenced with electronic payments made by employers via BACS to check that the tax data reported to HMRC is corroborated by the value of the net payment actually made.
For employers, the processes to discharge the new obligation will be embedded in the payroll process and the process of instructing their bank to make payments to their employees. That change will mainly affect the largest employers that split their BACS payroll payments under their own BACS service user numbers. There will be a new requirement on the banks to provide HMRC with the data needed to generate a reference that corresponds to that provided by the employer.
The regulations and directions that HMRC intends to make using the new powers provided by clause 223, which have been provided to the Committee, detail who and which payment services will be affected by the new obligations, the information that must be provided to HMRC and how that information is to be generated. Since the announcement in May 2011, HMRC has been in discussion with BACS member banks, which are the principal stakeholders affected by the changes. HMRC has continued to engage with BACS member banks in developing the draft regulations and directions and in publishing a wider package of draft regulations for RTI, the rest of which came into force on 6 April. In addition to giving HMRC the power to make the regulations and directions before the Committee, clause 223 gives HMRC further powers to make regulations relevant to the strategic solution for RTI.
I shall attempt to address some of the questions that the hon. Lady has raised. It would be wrong to say that RTI will impose additional burdens on employers, including small employers. The net effect is that RTI will reduce the burdens on business—HMRC estimates by about £300 million a year from 2014-15. It will be achieved by removing separate reporting processes, embedding reporting to HMRC as an integral part of normal payroll activity and enabling issues to be resolved in-year rather than after the end of the year.
The calculation of tax and national insurance deductions is not changing. RTI changes the frequency that PAYE information is reported to HMRC, which has worked closely with software developers on payroll products, so that employers and pension providers will be able to send us RTI information online as part of their payroll processes. HMRC has consulted its customers extensively on the operation of RTI. It is also working in partnership with employers, pension providers, software providers and the banking industry in the early stages of the pilot to get the best learning and ensure that the process is as user-friendly as possible. Reports show that the pilot is working well; more than 200 employers and pension providers are already in the pilot scheme, covering more than 1.5 million employees or recipients of pensions.
HMRC is not introducing new penalties in the 2012-13 tax year, or during the pilot period, but it may return to the matter.
I apologise for interrupting the Minister’s flow. He says that RTI will not be an additional burden on businesses, and that in fact there will be a reduction in their administrative burden. Could he respond to my query about businesses that do not have computers and do not operate online systems? I have been led to understand that the additional reporting requirements will in fact mean a fairly substantial increase in the dreaded red tape to which Members on the Government Benches constantly refer.
In my earlier remarks I made reference to the basic PAYE tools that are provided free by HMRC. They are available through dial-up and broadband connections; indeed, most commercial software packages also operate dial-up connection. As for businesses that do not use a computer at all, it is possible to purchase a computer for £149 through a Government initiative. There are details on getonlineathome.org. The net effect is a substantial reduction in the burden for businesses. As I have outlined, the PAYE system will be embedded into the payroll process.
In conclusion, real-time information will modernise PAYE and support the introduction of universal credit, which is dependent on it. The new powers will ensure the accuracy of the information supplied to HMRC and used by DWP. I hope the clause will stand part of the Bill.