Review commissioned by Chancellor calls for review of RTI

Earlier this month the Office of Tax Simplification (OTS) published their second business lifecycle review, focusing on the difficulties that small businesses face particularly when they take on their first employee and encounter RTI.

The comprehensive 82-page report considers many aspects of running a small business even before it has perhaps grown from a hobby to a possible way to make a living, all the way through the hoped-for growth stage and then to closing down or transferring ownership.

Small businesses* make up 99% of the 5.7 million businesses in the UK and 75% of those employ only the owner. I can assure you as one of those owner managers it is very different both carrying out the core tasks to drive an income alongside all the administration of running a business, compared to working within a business, as I did previously, where support functions exist to handle IT, finance and tax administration to name but three.

I was asked to be part of the OTS consultative committee for this review both for my knowledge of the complexities of payroll and as a small business owner. The review team were very willing to hear from practitioners in all aspects of tax administration, agents and business owners and that is reflected in the welcome recommendations they have made. Two of their key findings will resonate with readers of this blog:

  • improving the operation of the PAYE system, so that real time means that for HMRC too!
  • implementation of HMRC’s Agents Strategy

I’ll just focus on the chapter that is devoted to PAYE and the burden that a business faces when it takes on its first employee. £154bn of tax is collected by employers on behalf of HMRC and staggeringly even though this is 28% of all tax collected there is currently no strategic owner of PAYE within HMRC (and it shows!). The OTS comments: This is a significant gap, making it harder to prioritise and implement cross-cutting changes and sustain development of a future vision for PAYE. The OTS understands that HMRC is taking steps to strengthen its oversight of its core processes, and welcomes this.

 The OTS acknowledges, which HMRC has refused to do, that there are problems with RTI and that whilst HMRC may have seen improvements in tax code accuracy and the inflow of tax and tax related data, ‘the promised additional benefits – transparency and accessibility – have been slower in materialising’. They also comment that RTI, and PAYE more generally, does not reflect 21st century working practices such as multiple jobs, employment and self-employment and frequent job changes.

 The report comments that personal tax accounts are wrong, and that Universal and Tax Credit awards are being similarly affected by the corruption of data by HMRC systems which in turn leads to more work for HMRC through protracted queries.  Interestingly the report comments that there are 350,000 duplicate records a year. This is a significant increase on the figure quoted in the December 2017, RTI post-implementation report (PIR) which said 0.5% of records were duplicated which is, if we take there to be 40m taxpayers, only ( and I say this advisedly) 200,000. Personally, I’d like to add a nought to either figure given how many instances of duplicated records I encounter when lecturing.

The OTS offer to carry out a review of RTI for HMRC as they want to see the commitments in the 2017 PIR prioritised and addressed – HMRC committed to an action plan for RTI by March 2019 but have never delivered this. The OTS say that they want the focus of the report to be:

    • consider the fit between the PAYE/RTI processes and modern work patterns
    • identify options to simplify and streamline the PAYE and RTI system
    • consider options to ensure that PAYE and RTI processes are ready to support future streamlining of the tax system

Finally, for payroll agents who are fundamental to the delivery of PAYE  in this country, you aren’t forgotten either. The OTS recognise that HMRC has not made your life easy in not delivering on the agent strategy proposals to give you visibility of your client’s data – I’m sure there would be even more disputed charges if small employers knew they had a business tax account that flags all these data and payment issues before incorrect compliance activity starts.

There is also welcome recognition that employers are agents too: There should also be consideration of the role employers play. Employers effectively act as the PAYE agents for all their employees, the majority of whom will be unrepresented. Tax agents get a priority helpline: there is an employer helpline also, but the OTS comments that this is not a priority line. Employers, particularly those with larger numbers of staff, should also be considered for prioritisation.

This phrase is a neat summary of the report: ‘customer understanding is not consistently embedded in process developments, which can result in complexity and cause practical difficulties for taxpayers’.

Let’s hope HMRC react positively to this sterling piece of research and will work with the OTS and stakeholders to improve the experience of PAYE for all businesses.

 *fewer than 10 employees and an annual turnover of less than £2 million