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.