Government plans to introduce far-reaching changes to the PAYE system are worth exploring, the Chartered Institute of Taxation (CIOT) has said, but will involve substantial amounts of time, money and attention to detail if they are to work.
The CIOT was responding to HM Revenue and Customs’ discussion paper on proposals to reform the entire PAYE regime through which more than 40 million people pay their taxes.
The aim of the paper is to look at ways of reducing the administrative burden on employers and to eliminate many of the problems over a lack of up-to-date and accurate tax information that has dogged the system recently.
One of the plans floated by the paper is for Real Time Information under which details about the circumstances of individual employees would be fed to HMRC as soon as they change rather than waiting for a reconciliation process at the end of the tax year.
Such a move would, it is hoped, increase the accuracy of tax deductions, credits and student loan payments.
John Whiting, the CIOT’s tax policy director, described the proposal as “seductive” but warned that it would only be truly beneficial to employers if the new system was fully interactive.
Mr Whiting said: “The idea of information flowing from employers to government as soon as circumstances change, rather than being reconciled at the end of the tax year, is a seductive one, but this proposal would be likely to load additional costs onto employers, particularly those who do not currently use electronic methods for paying their employees.
“The real benefits of real time information would only be seen if the system became truly interactive and allowed three-way communication and data transfer between employers, HMRC and employees. We are a long way from that.”
The other proposal to emerge from the paper is that of Centralised Deductions.
This scheme would see HMRC holding all the relevant information about each individual employee’s tax liabilities and deducting the tax due before passing on the net salary to the employee’s bank account.
While conceding that Centralised Deductions would cut down on the admin burden for employers, the CIOT pointed to the problems that it would entail, particularly in areas of public perception and the resources that such a system would demand of HMRC.
Mr Whiting continued: “The proposal for centralised deduction of tax by HMRC should reduce employers’ admin burdens, but raises many other issues.
“Having the wages of every employee in the country passing through one huge data processor is high-risk and many people would be concerned by the prospect of their wages passing through the government’s hands.
“HMRC’s help and advice services would need much greater resources if they are going to have to field the enquiries about deductions currently being fielded by employers.”
The CIOT instead argued the case for Centralised Calculations as an alternative approach.
Using this system, HMRC would do the calculations for the appropriate income tax, NICs and student loan payments.
The tax authority would then simply notify the employer as to what deductions to make, and the employer would make those deductions as it does now.
This, the CIOT said, would allow the employer to retain a greater control over funds, while HMRC deals with all the calculations through a central processing engine.
The scheme could also be a first stage along the route to centralised deductions, building up confidence amongst employers and employees in the HMRC calculator, and ironing out teething problems.
In the short-term, the CIOT wants the government to focus on improving the operation of the new integrated National Insurance and PAYE Service computer system.
Specifically, problems with the quality of the data, which have led to the wrong codes being issued and potential over and under payments of tax, need to be resolved in advance of any more significant IT changes such as Real Time Information and Centralised Deductions.
Mr Whiting concluded: “The fundamental aim in this area has to be to get PAYE deductions to be more accurate so that the numbers of taxpayers over and underpaying each year are significantly reduced.”