RTI challenges faced by micro-employers
19 September 2016
A qualitative research study for HMRC was conducted; a study with a sub-set of micro employers that are finding payroll reporting Real Time Information (RTI) challenging, to understand barriers to compliance.
This research aims to understand:
- what drives error in reporting Pay As You Earn (PAYE) in real time among micro-employers; and
- how might HMRC best support micro-employers to comply with their PAYE reporting requirements.
Most micro-employers are meeting their ‘on or before’ reporting requirements without issue, submitting accurate returns to HMRC in full and on time. However, some micro-employers are not, i.e. their FPS reports are not submitted on time or are reported with missing and/or incorrect information. Furthermore, some micro-employers are using other RTI reporting facilities such as Earlier Year Update forms (EYU) in ways not fully expected. EYUs enable employers to amend the data previously reported for their employee when doing so during a later tax year.
These behaviours were concerning for HMRC for a number of reasons. Managing and resolving irregularities (such as late FPS reporting or EYU processing) is resource intensive for HMRC as each has to be investigated and corrected. Reporting errors also have the potential to impact negatively on the employees involved; they could lead to incorrect tax deductions or, in the future, could impact negatively on Universal Credit.
This research was conducted through 45 qualitative interviews in 2016 with micro-employers and their agents. Importantly, it involves only those who were known to have either received a penalty from HMRC for submitting a FPS late or with missing/incorrect information, or had made use of an EYU. The research participants are therefore a sub-set of all micro-employers.
- Regardless of how the micro-employers interviewed as part of this research manage their payroll, PAYE management is not integrated into the ‘payroll process’. Many do not see it as a coherent, end-to-end process at all, but a set of discrete and dissociated tasks.
- A lack of understanding of how PAYE real time reporting obligations should be managed is a main source of micro-employer error. Reporting PAYE is often treated separately from the core function of running the payroll, and tied to the (often less frequent) rhythm of paying HMRC and the related tax month deadlines.
- Dates (knowing what should be done and by when) present the biggest single challenge.
- Examples of good practice exist, typically when ‘running the payroll’ and all associated tasks are strictly managed and RTI reporting duties are integrated into the payroll process.
- Micro-employers’ and agents’ misunderstanding of RTI reporting is exacerbated by their own behaviours (lack of checks and low prioritisation), which also contribute to error in RTI submissions.
- Some errors involved in RTI reporting are attributed to factors outside a micro-employer’s control and these add to the opportunity for error.
- When compounded by poor understanding and capacity issues, errors can easily escalate from a single issue that should be easily solved to a cascade of problems that some micro-employers lose control over.
- Penalties can affect behaviour change but their impact is currently limited by a lack of understanding as to why the penalty was issued and a lack of explanation about the way they are implemented and enforced.
- There is no shortage of information to educate micro-employers about their duties but the investment required to make best use of the available resources (either in terms of time spent self-educating, or money spent on an advisor or premium software) can cause difficulties for those where time and/or available money is scarce.
- There are two emerging considerations for HMRC:
- The first is the need for HMRC to focus on better rather than more support, specifically, generating more accessible resources – such as a road map to guide micro-employers through the process, highlighting the key requirements to be aware of, with links to the relevant detailed information already available, and a summary of important dates to remember.
- The second consideration for HMRC is to introduce clarity and consistency on penalties. The penalty system is an existing communication channel and could be used to raise awareness of the causes of penalties by including more detailed information in the penalty notice letter itself, or signposting to a diagnostic tool to help micro-employers to identify the cause of error.
Read the full report: Managing Pay As You Earn in real time: challenges faced by micro-employers.