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PAYE reconciliations

If most of your income is taxed under PAYE (Pay As You Earn) you may soon receive a reconciliation of the income tax you have paid compared to the amount that was due to be paid for 2013/14. This calculation arrives on a form P800, which should be checked very carefully for errors and omissions. If mistakes are missed they can be carried forward for several years, resulting in escalating amounts of tax over or under-paid.

For example the High Income Child Benefit Charge (HICBC) may be due where you earn over £50,000 and your family receives child benefit. But the HICBC will not be reflected in the P800 calculation, as HMRC can’t accurately match child benefit claimants with the high earners in those families. If you believe you are due to pay the HICBC to claw-back the child benefit received, you need to register for a self-assessment and complete a tax return. We can help you with that.

Other common errors on the P800 arise from the changing value of taxable benefits, varying pension contributions, and estimated amounts of other income included in your PAYE code such as rents or interest.

If you have paid the right amount of tax under PAYE for 2013/14 you won’t receive a communication from HMRC. If you have overpaid tax you should receive a cheque from HMRC within two weeks of the issue of the P800. Don’t respond to emails promising a tax repayment – those are scams.

If the P800 shows you owe tax, that amount will normally be collected through your PAYE code for 2015/16. We can help you challenge the calculation if you think it’s wrong, but we will need to see the P800 you have received, as HMRC don’t send us a copy.

New RTI relief and penalties

Have you been struggling to send full payment summary (FPS) reports under RTI to HMRC on or before the days on which your employees are paid? This is particularly difficult when your workers receive irregular amounts of pay on varying dates. In such cases you may not know the amounts of wages and deductions to report until the workers have finished their shifts.

The concession for small employers with fewer than 50 employees has helped. This allows you to submit all the figures on one FPS report when you make your last payroll run in the month, but this must be no later than the end of the tax month. However, this concession ended on 5 April 2014.

The good news is that until 5 April 2016, employers with fewer than 10 workers will be able to send in the FPS covering all payments by the last pay day of the tax month. This new relaxation will only apply to existing employers. Any new PAYE scheme commencing on or after 6 April 2014, or any scheme with 10 or more employees will have to report all the wages and deductions on or before each day the employees are paid, even if that is multiple times in the month.

If you have 10 to 50 employees on your payroll, and have been using the small employer concession to cope with multiple pay dates in a month, we need to talk about how to adjust your systems from April 2014.

HMRC has experienced significant problems in reconciling amounts of PAYE due from employers, to the amounts reported under real time information (RTI). As a result some of the automatic RTI penalties which were to apply from 6 April 2014, will now apply from:

  • October 2014 for late filing of in-year RTI reports; and
  • April 2015 for late payment of in-year PAYE due.

However, interest for late paid PAYE will still apply from 6 April 2014. To keep on top of what PAYE you have paid and what HMRC thinks is due, you should view the business tax dashboard facility on the HMRC website at regular intervals. Unfortunately we cannot access the business tax dashboard on your behalf.

If you are late with filing your last RTI report (known as the final submission for the year) for 2013/14, a £100 penalty will apply. This penalty continues to mount-up at £100 per month, or part month, for each batch of 50 employees on the payroll, until the final submission is received by HMRC.

The full payment summary (FPS) for the last tax month will normally be your final submission for the tax year. This FPS should be submitted on or before the last pay day in the tax year, or by 5 April 2014 where you take advantage of the concession for small businesses.

You should not submit forms P35 or P14 for 2013/14 as the information on those forms is included on the final FPS or EPS submitted for the tax year.

If no employees are paid in the final tax month of the year you should submit an employer payment summary (EPS) as the final submission for the year. This EPS should reach HMRC by 19 April 2014. The EPS can also be used as the final submission if the last FPS for the year was not marked as the final submission for the year.

We can help you with the end of year payroll procedures if you are uncertain about what you need to do.

Disguised Employment

The Government is cracking down on situations in which workers are treated as self-employed for tax purposes, and hence pay low amounts of NICs, but from the outside they appear to act as employees. The following changes in the tax law are proposed to block the use of ‘self-employed’ workers working through LLPs or who are hired-out through employment agencies.

LLPs

All individual members of LLPs are currently taxed as self-employed persons, even if they receive a regular ‘salary’. This is the default position of the law and nothing is being ‘fiddled’ to put workers in this position. However, HMRC believe this rule is being abused, and the workers involved may not realise that they are technically self-employed.

From 6 April 2014 salaried members of LLPs will be treated as employees of the LLP if all of the following conditions are met:

  • the member works for LLP and at least 80% of the pay he receives from the LLP is ‘disguised salary’;
  • where the member has contributed any capital to the LLP, that capital amounts to less than 25% of the member’s ‘disguised salary’ for the year; and
  • the member is not involved significantly in the management of the LLP.

The Government has not yet defined term ‘disguised salary’. If you have salaried members in your LLP we need to talk about these tax changes.

Employment Agencies

From 6 April 2014 if a worker supplied by an offshore employment agency personally carries out the work, or is involved in the provision of the services, the payment from the engager to the worker will have to be taxed under PAYE with class 1 NICs deducted. Any apparent right of substitution in the worker’s contract will not prevent PAYE and NICs being due at the employed rates. The agency at the end of the chain must be an off-shore agency for the new rules to apply, but there may be UK based agencies in between and it may not be obvious to the worker or the engager of that worker, that an off-shore agency is in the chain.

If you have any doubts about the contracts you are using either as a worker or an employer, our tax experts can help check the tax implications for you.

If you have a child aged 16, check whether you are still receiving all the child benefit and child tax credits you expect to.

New real time information (RTI) messages

Real time information (RTI) is all about one-way communications with HMRC. Your payroll software sends reports (called FPS or EPS) to HMRC about the deductions made from your employees’ pay, and normally you hear nothing back.

That is starting to change. HMRC is now sending electronic messages to employers to inform them that not all is well with their RTI reports. The first messages concern late submitted FPS reports, but in future there will be messages about late paid PAYE and missing RTI reports.

It is important to get the FPS in on time as then HMRC know that the amount of PAYE paid for the month agrees with the deductions you have reported on the FPS. HMRC will not impose penalties for any late FPS submitted within 2013/14, although the final FPS for 2013/14 (which closes the tax year), can carry a penalty if that is significantly late. The messages about late FPS reports are thus just a warning from HMRC in this tax year, but may indicate there is something wrong with your systems.

From 6 April 2014 there will be automatic penalties for filing a FPS late within the tax year. ‘Late’ means it arrives with HMRC after the date on which the employees were paid. There will also be penalties for paying PAYE late.

In order to pick up these electronic messages from HMRC you need to use your payroll software, or log on to HMRC’s PAYE online services, then look for notifications. The messages are also available using the HMRC’s PAYE desktop viewer (PDV) software package. However, the PDV has just been updated so you may need to download the latest version first.

These electronic messages about FPS will be the first of many important messages concerning RTI, so you need to get used to looking for them.

RTI penalties around the corner

This tax year (2013/14) is the first year in which the majority of employers have submitted their PAYE data using real time information (RTI). HMRC has not yet imposed penalties for late RTI submissions made within the tax year, but that is about to change.

From 6 April 2014 penalties will start to accrue after the first failure in each of these situations:

  • filing a full payment submission (FPS) after the date of payment stated in that report;
  • failure to file an employer payment summary (EPS) showing a nil payment when required; and
  • failure to pay the PAYE due in full, and on time for a particular tax month.

Note that currently there is a concession for employers with fewer than 50 employees. If all the conditions apply they can file just one FPS by the end of the tax month, irrespective of the number of times they have paid employees in that month. This concession is due to end on 5 April 2014.

The penalties for late submissions will vary according to the number of employees on the payroll. The smallest payroll with up to 9 employees will suffer a £100 penalty for every month for which the FPS is filed late. Larger payrolls will be charged £200, £300 or £400 per month for the same failure, for up to 11 months per tax year. If the employees are paid more frequently than monthly, only one fixed penalty will be applied per month.

Where no payment has been made to employees in the month HMRC expect to receive an EPS reporting a nil payment, unless the PAYE scheme has been registered as ‘annual’. If no nil EPS is received this will give rise to a penalty.

Penalties for late paid PAYE already apply, but such penalties have not been imposed so far. Late payment penalties are charged at 1% to 4% of the amount that is paid late for the tax month, with the penalty percentage increasing as the number of months of late payment mounts up in the tax year.

You will be informed that a penalty is potentially due by an automatic electronic message from HMRC. These messages are already being sent for late FPS, but they are just warnings at this stage. Other types of warning messages will commence in the next few weeks. Where a penalty is due for a tax month it will be imposed at the end of the tax quarter.

Please talk to us if you get any warning messages from HMRC, as we need to sort out why there is an apparent fault in submitting RTI reports or paying the right amount of PAYE.

Planning as RTI gathers pace

We warned you previously about the new real time information (RTI) process. Now the Taxman is writing to all employers who are not already part of an RTI pilot, to tell them how to prepare for RTI.

To recap: RTI is a new way of submitting payroll data to the Tax Office. Instead of sending PAYE information to HMRC once after the end of the tax year, employers must submit their payroll data online on every occasion their employees are paid.

If you run a computerised payroll, your payroll software should be updated to cope with RTI. However, do check with your software provider, as some payroll packages are not going to be revised for RTI. In which case you need to find new payroll software, or use the free software provided by HMRC (for up to 9 employees), or ask us help you process your payroll each month.

All small and medium sized employers will be expected to start using RTI to submit payroll data from April 2013, unless they have agreed a different start date with the Tax Office.

Once you receive an ‘invitation’ from the Taxman to use RTI, you must join the RTI system from the date directed.

You will need to collect some new data items under RTI which are not currently required for PAYE, such as:

  • Hours worked per week for each employee based on one of four bands;
  • Details of those earning less than the lower earnings limit (£107 per week);
  • Which employees are paid irregularly, perhaps only once per year; and
  • Passport numbers for employees who do not have NI numbers.

In addition you will need to have the correct NI number (where this exists), date of birth, gender, full name and address for each employee.

We can help you with the transition to RTI, but please start thinking about what help you might need sooner rather than later.

Employers with fewer than 5001 employees will have to operate RTI from 6 April 2013, and that includes one-man companies. Some employers have already started to use RTI under the pilot program. Individuals who employ carers in their own home may be able to defer migrating to RTI until April 2014.

You need to check whether your payroll software will be RTI-ready from April 2013. Don’t assume it will be. Some software providers have decided to discontinue legacy packages and force you to move to more expensive offerings. Even HMRC is cutting back on the free payroll software it provides. The HMRC PAYE Basic tools will work under RTI, but only for up to nine employees, and it does not handle net pay arrangements for employer pension contributions.

If you use an external provider to run your payroll, you must talk to them about how much it will cost to run your payroll from April 2013. RTI requires more data to be submitted to the Tax Office than currently required (see below). Also the RTI reports must be sent on or before the day on which employees are paid, which could be daily or weekly. Currently the Taxman requires an annual report of what has been paid and deducted under PAYE.

The ‘on or before’ requirement has been relaxed in limited circumstances where employees are paid in cash on the day they work, and the amount of payment cannot be known in advance. This may apply to bar staff and crop-pickers. However, the RTI report must still be made within seven days of the day of payment, or when the next payroll is run, whichever comes next.

As the purpose of RTI is to provide accurate information to the DWP on claimants’ earnings, employers are required to provide the weekly hours worked by each employee, as they fall into the following bands:

  1. Up to 15.99 hours
  2. 16 to 24.99 hours
  3. 30 hours or more
  4. Other

You don’t have to record the exact hours worked, only the normal hours the employee is expected to work.

RTI penalties will commence from April 2013. However, these are only penalties for inaccurate returns, not for late returns.

Penalties for inaccurate returns are not issued automatically and generally are only applied after a PAYE inspection (employer compliance check). However, as under RTI the employer will be making as least 12 reports a year (full payment submissions: FPS), the risk of inaccuracies creeping in must be greater than under the current once a year reporting system.

Penalties for late FPSs submitted within the tax year will be issued automatically, but not until after April 2014. However, the final FPS for the tax years 2012/13 and 2013/14 will be subject to a late return penalty if it is not received by 19 May following the tax year end.

Please talk to us about how your business can meet the RTI challenge and how we can help. You have just four months to get ready.

We have included some information direct from HM Revenue & Customs which you may find informative.