PAYE needs to be updated for modern working patterns
17 May 2019
The Office of Tax Simplification (OTS) has published a report which includes recommendations to improve the operation of the PAYE system for smaller businesses and to enable agents to see the same information as their clients and carry out any tax transaction their client wishes them to.
The report ‘Simplifying everyday tax for smaller businesses: a further business lifecycle review’ was commissioned by the Chancellor of the Exchequer and the scoping review was published in July 2018.
It is a particular priority for the OTS to focus on improving the experience of individuals and smaller businesses in engaging with the tax system. During review for this report, the OTS consulted many individuals involved in smaller businesses, advisers and representative bodies.
HMRC defines a small business as one with annual sales not exceeding £20 million, which employs no more than 20 people. A micro business is one with sales up to £2 million and no more than 10 employees. 75% of small businesses do not employ anyone other than the owner(s).
The recommendations from the OTS cover five themes:
- Providing simple step-by-step guidance about the key things a business needs to do in its early days to help things run smoothly
- Improving the operation of the PAYE system
- Implementation of HMRC’s Agents Strategy
- Improving the mechanics of the Corporation Tax return process
- Ensuring that tax changes are built on an understanding of business processes
Under ‘improving the operation of the PAYE system’
If better quality information fed more quickly (and accurately) into the system, this would be helpful for taxpayers and could reduce queries to HMRC. In particular:
- The current system does not handle the fluidity of the modern workplace very well, for example in relation to changes of job mid-month or individuals holding multiple jobs or concurrent employment and self- employment
- System problems lead to significant costs for businesses, agents, employees, and HMRC itself. For example, there are around 350,000 duplicate employment records, and around 5% of returns are received late
System change would have upfront costs but should soon pay for itself, improving employer and taxpayer experience, and efficient tax collection.
A strategic focus on the PAYE system should be an HMRC priority to ensure effective implementation of improvements and system changes. In addition to ensuring that there is appropriate oversight of the system, the strategic focus should include:
- Ensuring that the commitments made by HMRC in the 2017 Post- Implementation Review of Real Time Information are prioritised and addressed
- Working with employers and their agents, to identify areas where the system is not working efficiently and to design and agree solutions
A roadmap should be drawn up to show the stages of progression and planned changes over the next 5 years.
A fresh review of areas where the PAYE/RTI system should be improved should be carried out, possibly by the OTS. The focus of this review would be to:
- 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
Agents’ role in supporting compliance with the tax system is recognised in HMRC’s 2014 Agent Strategy, which commits HMRC to a number of initiatives to help agents. Some of these have been completed, but HMRC has struggled to prioritise implementation of this strategy in the face of other demands.
The principles set out in the Agent Strategy seem sound and reasonable: they include enabling agents to see the same information as their clients and carry out any tax transaction their client wishes them to do. The challenge lies in implementation.
The OTS’s recommendations are intended to encourage consistent implementation of the strategy, to ensure that agents are able to support clients in complying with tax at minimum cost.
HMRC should appoint a senior official to oversee and prioritise implementation of the Agent Strategy
The focus of this role should include ensuring that agent needs are built into new systems; developing constructive engagement with the profession, to ensure that agents feel listened to and understood; as well as working with HMRC officials to increase their understanding of the role of agents.
HMRC should routinely build agent awareness and needs into system design and improvement and its related guidance
The government should produce a roadmap setting out dates for implementation of the key improvements, such as the ability of agents to see data relating to their clients and ensuring that consideration of agents is a mandatory part of all new system redesign. Improving agent engagement feedback scores would be one way to monitor the impact of improvements.
This recommendation includes ensuring that agents are copied into key exchanges with clients, a longstanding practice that seems to have been missed in some recent process redesigns.
Read the report in full - Simplifying everyday tax for smaller businesses: a further business lifecycle review