The consultation for Real Time Information (RTI) was released in July 2010 and also included the prospect of centralised deductions. The proposal was that employers would submit payments and information to HMRC every pay period (week or month) and HMRC would collect the gross pay and calculate the net entitlement of the employee and submit it to his bank account. A move towards this kind of state control was strongly resisted and so a release in December 2010 sought to allay fears and took out the prospect of centralised deductions in favour of pure RTI.
Real Time Information (RTI) will be introduced next year (2012), piloted by large employers such as banks and government departments and then by medium employers the following year. It is the biggest change to the UK taxation system since the introduction of Pay as You Earn (PAYE). HMRC (the government's debt collection agency) have stated the requirement to change PAYE as it is "outdated" and no longer fit for the purpose in the modern workplace. The government estimate that £2 billion is lost every month through unpaid tax in the current system which only requires detailed reporting by employers at the year-end every April.
Under the current system of PAYE, when w person has more than a couple of jobs at the same time it is hard for HMRC to issue tax code notices quickly enough to enable employers to tax the individual properly, usually resulting in the employee paying too much tax and having to reclaim the following year. This causes temporary hardship for the worker and a whole lot of admin for HMRC.
So they want to create a system where they know each week or month, exactly what a person has earned in any year and to apply a tax code notice accordingly. They will also know exactly what tax is due from the employer at the point of payment and therefore will know when an employer underpays the amounts due. Currently some employers might underpay their tax with the intention to repay it the next month in order that they can use the funds for cash flow reasons. Employers shouldn't be doing this but the temptation is obviously there as HMRC will not know at the end of the year if they have paid up to date. I assume that employers using the tax for these reasons often go bankrupt and therefore HMRC never manage to recover all the tax, costing us all up to £2 billion a month in lost tax revenue.
It must be noted here that if HMRC cannot cope with issuing tax code notifications in a timely manner annually or monthly, it is hard to imagine what they will do with the masses of information they are going to receive weekly once RTI is fully implemented. There are currently around 20 million people employed in the UK, if a quarter of them are weekly paid that's 260 million reported transactions per year, in 52 separate reports.
Jason Paul Hargreaves is the Operations Manager for Bar 2 Limited http://www.bar2.co.uk/ a payroll and Umbrella Company in the UK. He also runs the company blog at http://blogger.flexibleworker.org/.
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