8 May 2013    |    Uncategorized

RTI – another ‘wrinkle’ in the processes

RTI was supposed to smooth the flow of information between employers and HMRC, and ensure that the employee always paid the correct amounts of tax.

There are already a large number of anomalous situations which have been treated as exceptions from the requirement to file by RTI, such as employees requiring double tax relief to be applied.

Another anomaly has just reared its ugly head, and the unforeseen implications are going to play havoc with the tax deducted from employee earnings. Thankfully, it is higher rate employees who are most likely to suffer the worst effects, but some low paid employees will be caught in the process too.

Here’s an example:

You leave your monthly paid job on Friday 10 May 2013. Your last payslip to 10 May includes the last few days wages (plus holiday pay etc.) and you will get your P45 at the end of May when the May payroll is run.

You start with the new employer on Monday 13 May, and find that the employer pays you in the middle of the month (17th May in this example).

The new employer adds you to the payroll and pays you for the first 5 days, notifying HMRC that you are a new employee, and correctly uses the emergency tax code.

HMRC receive the May payroll run from the new employer, and assumes you have two employments as the ‘leaver’ notification from the old employers won’t be sent until the end of May when the RTI reports are sent.

HMRC rightly issue a BR code after receipt of the RTI submission by the new employer, as this is an automatic reaction by the computers. In the second month of employment, the employee moves to paying only basic rate tax at 20% instead of having an emergency code. If the employee pays tax at higher rates, they will hugely underpay tax.

The old employer submits the leaver notification and the new coding to the new employer gets flagged on the HMRC computer to be issued, subject to manual intervention.

Of course, if the employee actually gets the P45 from the old employer and and brings it into the employer in time, the correct code and previous earnings might get processed in time, but we have already seen BR codes being issued after the leaving P45 has been issued and processed.

Of course all of this drops out eventually, but it is just another complication that payroll departments and payroll bureaus really don’t need, and is going to chew up huge amounts of time and effort.

Now turn this around, and consider the lowest paid employee who leaves a monthly paid job to take up a weekly paid job and finds themselves paying BR tax for a few weeks when they should not be paying any tax. The implications could be extremely severe for a few weeks, with the alternative of spending hours on the premium rate phone line to HMRC to try and sort the coding errors out.

Is there a better solution? Yes, how about admitting HMRC got it wrong and designing the software requirements so that leaver notices can be automatically submitted immediately the leaver date is entered, with a confirmation sent with the FPS. New employers should have the option of notifying that this is the sole employment with a P45 to follow, so that the HMRC computers can avoid making the wrong assumptions.

If this isn’t sorted, when the Universal Credit comes in, you are going to have benefit claimants whose tax record shows two employments and takes them out of the entitlement for benefits, which are duly cut. Until the P45 arrives, at which point it all needs to be corrected.

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