tiintax

You may remember that, in 2010, the idea was floated that we should update the pay as you earn system.  Why should employers have to calculate how much tax to deduct from wages and salaries?  Wouldn’t it be neat if you could build some kind of machine – or, OK, some kind of app – that would work it out?  Plug that into the banks, and the employer could just transfer your whole salary to you and the bank could siphon off the bits of that money that go to HMRC using the magic machine/app.

The newspapers put paid to that one pretty quickly!  And, frankly, would you trust

1. government IT procurement and/or
2. banks

as far as you could throw them?

So, er, no.  Or indeed “hell no!”  But the PAYE system was still in dire need of updating – so then there was RTI.

RTI, for the uninitiated, stands for “real time information” – the “minor” change to PAYE that means employers will have to tell HMRC what they’ve paid when they pay it (and not six months or a year later).

Oh, and there’s an administrative burden “saving” to employers, because they won’t have to fill in P60s and P45s at the end of the year or when people change jobs any more; all the information will go seamlessly to HMRC when the salary payment is made.

Which, if you’re an employer with a payroll that’s computerised and a who pays via the bank, well, might actually be true.  The impact assessment thought there might be a billion quidsworth of savings.  Particularly if you don’t, er, quantify any costs!

RTI is, in fact, already here – for the small number of employers taking part in a pilot scheme.  And more employers are being added – did you know that?  And ALL employers will (or at least should) be in RTI by autumn of next year.

OK.  So far, so good.

But there’s a certain amount of, what we might politely call, “making it up as you go” involved here.  Taxation magazine pointed out on 22 August  (sorry, it’s behind a paywall) that there will be problems involved in paying

• Casual workers
• People receiving tips via a tronc

and various other special cases, because the RTI return has to be made at or before the time of payment.

So it’s Saturday night and you’re a pub landlady and your barmaid just called in sick and you call the two students who work odd shifts for you on standby.  They’re going to expect their wages in their hand when they go home at the end of their shifts, aren’t they?  So are you going to spend your night filling in their RTI details on your laptop so you can make them a legal payment… or are you going to go cash in hand and take your chances?

So you’re a restaurant and the tips go into a jar and the head waiter divvies them up on a Saturday night.  Is he really going to sit down and enter all the details of the payees into his laptop before he goes home?

But more worrying to me is the abolition of the Simplified Deduction scheme, which was known as the “nanny” scheme – a simpler set of deduction instructions for people who found themselves employers but who weren’t actually businesses, like people who directly employ a nanny or a cleaner (rather than paying them via an agency).  This one worries me a lot, particularly because of trend in providing services to people with special needs because of age or disability by giving them a budget and asking them to arrange their own services.  These are not people who will be immediately comfortable with running a PAYE scheme to pay for the carer who gets them out of bed in the morning.  In the equality section of the RTI TIIN published in March this year it said:

Care and support employers are individuals who employ carers to provide services to a disabled or elderly person in their home. This group of employers will join RTI from April 2013 and HMRC will offer them the option of monthly paper filing of information. They will also be able to use HMRC’s free updated Basic PAYE Tools which are available for all employers who employ nine or fewer employees, allowing them to submit RTI via the internet. HMRC has also provided funding to the Low Incomes Tax Reform Group (LITRG), to help them develop online guidance for care and support employers.

which, frankly, looks to me like an enormous exercise in Missing The Point Entirely!

In this context then you can see that I might not be too fussed about a consultation document that is concerned with penalties to be imposed for failure to comply with RTI.  In my view it’s absurdly premature to talk about penalties for failure to comply with a scheme that you’re making up as you go along.  Introduce it, work out the kinks, give it a couple of years to see what the compliance rate looks like… and THEN see what sanctions you need for the few who play fast and loose with the system.

Nevertheless, that isn’t the question being asked.  But here’s what I said in reply.

This is an individual’s response and will also be published, with commentary, on my blog, http://tiintax.com. I have followed the question schedule set out on page 35 of the consultation document.

Q1. Do you have any comments on RTI and error penalties that will help us support businesses and promote timely filing under RTI?

I think it is wholly premature to be talking about penalties at this stage in the process, when there are enormous outstanding questions about how the scheme will operate at the margins. At the moment HMRC should be concentrating its resources on “support” rather than punishment. “Care and support” employers, in particular, should be exempt from penalties except in cases where a criminal penalty could be sought – in other words where the department can produce evidence of deliberate default rather than failure to understand and apply the system.

Q2. How best can we support employers in understanding their obligations under RTI and implementing the new system?

Not via penalties! An advertising campaign, dedicated support teams, face to face training and assistance – all the kind of support services that HMRC used to be able to provide via its local office network, its employer support teams and its advertising and comms team. Otherwise there’s a serious risk that micro employers will move to cash in hand payment by default.

Q3. Is there a better or simpler way, than banding by potential filing defaults, of recognising the size of the employer but also the amount and regularity of the information to be supplied under RTI?

I would make an exception for cash payments of less than £X, where X is something like the minimum wage x say 5 days and the employer is a micro business. So the pub paying its casual staff on a Saturday night has a couple of days grace to get the RTI return made without being hit with an automatic penalty (but would still be hit if the RTI information isn’t provided within say a week) – so the crisis can be covered and RTI dealt with as part of the normal working week even if it is a couple of days behind.

Q4. Are there particular adjustments that should be considered to take account of more frequent payments?

It depends really on whether your aim is to make everyone move to electronic submission and payment. Someone who is reporting on paper should be allowed to make monthly returns – but presumably you won’t want large employers to make paper returns mischievously. So this is as clear a case as I can envisage of a case where the government’s own policy to exempt micro businesses should be followed.

Q5. Should a penalty be charged as soon as a return is late or would employers prefer penalties to be charged later, perhaps each quarter?

Um – “prefer”????? What are we talking about here? If we’re working in a world where you ask people how they “prefer” to pay penalties, isn’t there some kind of presumption that penalties will be routine? And yet I thought it was clear HMRC policy that penalties would be just that – they would be PENAL – and only apply to people actively subverting or avoiding the system, not to people confused by the system or making an honest mistake?

In which case this is a nul question. You don’t get a choice about a penalty! But my preference, in my capacity as a citizen stakeholder, would be for defaulters to be charged penalties as soon as the return was late – if it’s genuinely aimed at getting them back on the right track then they need to know straight away that their actions have consequences.

Q6. Do you agree that only one late filing penalty should apply to each PAYE scheme each month, regardless of how many returns are late that month?

Yes

Q7. Should the RTI late filing penalties include a further penalty if a return is outstanding at the 6 and 12 month points?

No. You ought to be well beyond late return penalties and into corrective action by HMRC at those points.

Q8. What are the benefits and downsides of phasing the introduction of automatic late filing penalties for RTI along the lines set out above?

It’s absolutely vital that late penalties are only applied to the very largest employers and in the case of deliberate default first, and then phased in by size of payroll, not reaching the micro business employer until the system is fully mature. And arguably never reaching the “care and support” employer at all.

Q9. Should consideration be given to including a default that does not attract a penalty along any of the lines set out above?

No. A “default that does not attract a penalty” needs to exist in the system, but this is a case where HMRC shouldn’t be judge and jury but should be required to charge a penalty via a tribunal process rather than automatically. So I would exclude micro businesses from any automatic penalty regime while leaving the option of HMRC taking offensive cases via the tribunal system.

Q10. We would be grateful for comments on the detailed design options set out above. In particular, how should we encourage employers to use the nil return facility where there is no information to be returned? Is any additional incentive or sanction needed over and above the fact that a late filing penalty may be issued if an expected return is not received?

This baffles me, I’m afraid! If RTI is predicated on a return being made whenever a payment is made, how would HMRC know that any payment had been made in a “pay period”? What IS a “pay period” for these purposes?

Example: I’m thinking of taking on a casual employee to do work on my garden. I’d think about taking on a student and employing them as-and-when I have work available. So I might pay them a tenner every week for an hour’s work in the summer, but once every six weeks in winter – but then a one-off £50 when I needed some help lifting and carrying. What would be my “pay period” – or are you assuming that this kind of casual arrangement would be “cash in hand” and not touch the sides of RTI in 99% of cases?

Q11. What are the pros and cons of charging penalties for late filing and late payment at the same time?

It’s one of my pet peeves about the tax system that the two aren’t linked – it’s absolutely no use to anyone to establish a requirement to pay £x, a penalty of £y for not returning the requirement to pay £x… and then never bothering to collect either of them!

Q12. We would be grateful for comments on these models, or any combination of the elements included in the models. We would especially welcome ideas to simplify them, but which still support and encourage compliance with the RTI information obligation.

See comments above on the need to exclude micro businesses. In accordance with the government’s stated policy on the small firms, micro businesses should be exempt from regulatory change unless there’s a really good reason not to.

Q13. We welcome comments on these proposals. (This refers to the changes to the existing late payment penalty model).

It would be in keeping with what I understand of the RTI proposals, as well as a welcome simplification for everyone, if late return and late payment penalties were merged. Why doesn’t the submission of a return also trigger the submission of a payment? Employers should no longer be able to use their PAYE scheme as a cash flow tool. It’s not their money – it’s their employees’.

Q14. Should we consider charging late payment penalties quarterly?

As above, the late payment should trigger the penalty; the penalties shouldn’t be “banked”… and anyway, they should be merged with the return penalties.

Q15. Should we consider allocating employers to a quarterly stagger period for both late payment and late filing penalties under RTI?

No

Q16. Are there any particular easements that we should consider for new employers?

You need first to provide information, training and support. Until those are in place – and I don’t believe they are at present, and I don’t believe HMRC has the resource to provide them on a continuing basis – then no penalties should be chargeable.

Q17. Do you have any views on applying interest to late payment and late filing penalties under RTI?

I think penalties should be clear, simple and immediate. And collected. There should be no need to apply interest if you apply active collection methods.

Q18. Do you have any views on applying a late payment penalty as well as interest where further sums become due for a period?

I don’t think it’s a good idea. There should always be the possibility of drawing a line under the past and moving on. So if someone fails to make an RTI return and payment it should be clear to them they’ll be charged a proportionate penalty and it should be collected immediately – and if possible (depending on the “payment period”) before the next return and payment are due.

Regards