Concerns over Tory PAYE shake up
Posted by admin in Strategy & Planning on Wed, 24/02/2010 - 10:49
The Institute of Payroll Professionals' Karen Thompson outlines the areas of uncertainty surrounding the Conservatives proposed changes to income tax.
The Conservative Party has released new proposals for a new automated bank-based system that would remove the responsibility of deducting and paying income tax from employers.
Under the proposed system, income tax and national insurance contributions would automatically be deducted from employees' gross pay, removing the need for employers to process different tax codes and pay income tax for employees. This means the responsibility for calculating NI and income tax contributions would fall to HMRC.
So what could this potentially mean?
- Employer submits gross pay information to HMRC via the BACs system
- HMRC calculates the tax and NI due (not clear if employer’s liability also)
- HMRC sends back the net pay to the employer
The report suggests that this will save employers copious amounts of money due to them not calculating the tax and NI, but is this the case? There are a few unanswered questions that remain:
Research shows that the main difficulty with business and payroll is deciding what is taxable, rather than calculating the amount.
Although electronic communication is a proven, reliable service for employers; if PAYE is not broken why fix it? We appreciate the problems of late with the NPS and incorrect tax codes but is this a matter of inadequate funding for the systems or insufficient resources for HMRC to carry out their duties effectively?
Immediately there are areas that would require further exploration:
- Gross pay – this is made up of many elements, some are taxable and others are not, so how would HMRC deal with this?
- Pension contribution deductions
- Payroll giving contributions
- Other deductions such as attachment of earnings, union subs etc.
- How would it work for salary sacrifice where the employer uses the payroll system to reduce the monthly amount rather than enter the actual amount?
- If money taken directly for employee tax and NI how would it work for employer NI?
- Cash flow issues as business has developed its processes around the current system
- Late leavers i.e. now an employer might do a BACs recall and re-process manually how would this work?
- How quickly would HMRC turn it around so that the employer could deduct items from net pay such as a company loan and of course provide a payslip?
- The UK business has invested in payroll software – what happens to these businesses?
- The UK business has invested in specialist tax and payroll professionals – what happens to these people?
Research has shown that calculating PAYE and NI is not a problem for business - the areas of concern are in fact around benefits and expenses and understanding the rules of when something is or isn’t taxable and the method by which it is reported.
On reflection, there are better ways to improve the PAYE system including providing sufficient funding to HMRC to improve their systems and ensuring sufficient staffing to assist customers.
Karen Thomson is associate director of policy, research and strategic visibility at the Institute of Payroll Professionals (IPP).
The Bottom Line:If Mr Cable has his way...
"If Mr Cable had his way, all the big banks would be broken up and bonuses would be virtually eliminated - a sure-fire way in my view of guaranteeing an end to the UK’s ability to compete as an international financial centre. Let’s not forget that this is a man who is on record as saying that everyone who works in a bank has an ‘aristocratic lifestyle’ clearly demonstrating his lack of understanding of the sector." A tough line on bankers’ bonuses could make a brain drain of financial talent a distinct possibility, warns Paul Marsden. Read more