News Items – at 2^nd July 2008

Introduction

HMRC’s periodic Notes for Payroll Software Developers is usually an good source of advance information and the latest issue is no exception.  We know now that the new personal allowance, announced by the Chancellor in response to pressure to assist those affected by the removal of the 10% tax band, is to be introduced (subject to parliamentary approval) from 7 September, i.e. tax week 23.  Other news in the Notes include details of reduced online services while HMRC’s computer systems are updated in October.

Juror Financial Loss Allowances

Increases from 2 June 2008

With effect from 2 June 2008, the maximum daily rates of the financial loss allowances available to jurors have been increased by 2.2%, as follows:

Further information:
Jury Central Summoning Bureau  020 7202 6800

Professional Fees and Subscriptions

List 3 updated

HMRC approves professional bodies that meet the statutory criteria so that individuals can obtain tax relief on their annual subscriptions.  Employers may also obtain a dispensation to avoid the need to report subscriptions they pay on behalf of employees.

The full list of professional bodies that have HMRC approval is published in List 3. The list has been updated and is now current as at the end of May 2008. 

Further information:
List 3: Deduction for fees and subscriptions paid to professional bodies or learned societies  http://www.hmrc.gov.uk/list3/index.htm

Personal Tax Allowance

Increases from September to reduce the impact of removing the 10% tax rate

(The following news item, which we published in May 2008, has been updated to incorporate further information that HMRC has released recently.)

On 13 May, the Chancellor announced to Parliament that, in order to reduce the impact of the removal of the 10% tax rate from April 2008,

• the personal allowance will be increased by £600, from £5,435 to £6,035 and backdated to the start of the tax year, giving a new emergency tax code of 603L
• the basic rate limit, the amount of earnings on which 20% tax is due, will be reduced from £36,000 to £34,800, and, as a result,
• the higher rate threshold, the point from which 40% tax is due on earnings (i.e. the sum of the personal allowance and the basic rate limit), will be reduced from £41,435 to £40,835.

About 40 million people will benefit from the change and some 600,000 low-paid employees will stop paying tax altogether.

There is no corresponding changes to the NICs earnings threshold, which has deliberately been set at the same level as the tax threshold since 2001.  The starting point for the payment of both income tax and NICs is currently set at £5,435 for both taxes.  The two rates will diverge from September 2008.

Implementation date
HMRC expects that the government will make these changes effective with effect from 7 September 2008, i.e. tax week 23.  All suffix codes will increase by 60 points, e.g. from 543L to 603L.  Employers should not change any other tax codes until instructed to do so by means of a revised P6 coding notice.

The overall effect is to reduce the taxable pay of 20% taxpayers by £600 during 2008/09, with a resulting fall of £120 in the amount of tax paid in the year.  Monthly-paid employees with cumulative tax codes will receive £60 of this £120 in their September pay, followed by £10 a month for the rest of the tax year.  Weekly-paid employees’ pay will increase by about £53 in week 23, and by about £2.30 per week thereafter.  Employees with non-cumulative codes will receive an increase of £10 (monthly-paid) or £2.30 (weekly-paid), and will receive the full increase when either they are given a cumulative code during this tax year, or after the year end when their full liability for the year has been determined.    

Overall impact on employees
The impact of the changes will be that employees with the new 603L emergency tax code applied on a cumulative basis,

• will stop paying tax altogether if they have annual earnings that do not exceed £6,035
• will pay £120 less tax over the tax year (i.e. £600 @ 20%) if their annual earnings exceed £6,035
• will start to pay tax at 40% if their annual earnings exceed £40,835
• will pay tax at the same level if their annual earnings are £41440 or more.

The Chancellor did not claim that the increase in the personal allowance would remove altogether the effect of scrapping the 10% tax rate and, indeed, employees earnings between £6,035 and £10,510 will still pay more tax than they would have done if the 10% rate had remained in place. At the same time, employees earning between £16,000 and £40,000, who were already benefiting from the April 2008 changes, are gaining a further £120 a year in their net pay.

The following chart compares the effect of the changes that were introduced from April 2008 (i.e. personal allowance of £5,435 and basic rate limit of £36,000) with the further changes that are to be implemented in September 2008 (i.e. personal allowance of £6,035 and basic rate limit of £34,800).  The personal allowance used for 2007/08 is £5,225. 

There are no changes to the age 65 and 75 personal allowances.  These have already been increased substantially from April 2008.

Instructions for employers
HMRC will send guidance to employers and payroll agents starting 23 July.  The changes must be applied from the first payday on or after 7 September 2008.  A new Employer CD-ROM  will be issued between 13 and 26 August and will include

• new P7X instructions
• new Taxable Pay Tables B to D
• new Calculator Tables
• a new Employer Helpbook E12.

The P6 coding notices (provided online, in paper form, or as a listing, as appropriate) for employees without L suffix codes will be dated 24 August.  No further P6s will be issued after this date until 14 September.  If P6s for some affected employees are not received in time, they must be applied at the next available pay run.

Outstanding issues
From a payroll perspective, there are many, and as yet unanswered, questions and issues raised by this announcement.

• As the lower thresholds for tax and NICs are going to be different in future, there must be a question mark over the Government’s intention, from April 2009, to align the higher rate tax threshold with the NICs upper earnings limit.  If the policy remains intact, the reduction in the higher rate threshold from September 2008 will result in a lower aligned figure from April 2009, down from an anticipated £44,000 to £43,300.
• The changes introduce a major unplanned project into HMRC’s schedule and budget for the year, involving new technical specifications for developers, revised Helpbooks and Employer CD-ROM, communicating changes that will affect every employer’s payroll at an unprecedented time of the year, issuing new P2 coding notices to taxpayers and new P9 coding notices to employers for employees without L-suffix codes (as if it were the start of a new tax year), and considerable scope for errors!
• All of the payroll software developers will have what is effectively an additional year-end update to build, test and issue for the September deadline.  The development will involve considerable structural changes to their systems as, in some cases, they have not been designed to handle three different sets of tax rules within the same tax year.  Like HMRC, they will also incur costs for which they have not budgeted and will be putting demands on development staff who will already either have planned holidays during the summer period or be committed to in-year filing and new P45 developments..  Depending on the terms of the licenses with their clients, the developers may not be able to pass on these additional costs.
• Employers must expect a new update to their payroll system in advance of tax week 23, creating similar resource and financial issues.  Many of the staff in payroll departments and IT departments will be taking holiday after the end of the year-end reporting period, creating potential risks in successfully installing and testing the necessary new payroll updates.

Further information:
13 May 2008 Chancellor’s Announcement  http://www.hmrc.gov.uk/news/may13.htm
PAYE (Pay As You Earn): change to personal allowance  http://www.hmrc.gov.uk/employers/change-to-pa.htm
Notes for Payroll Software Developers – June 2008  http://www.hmrc.gov.uk/comp/notes-11-5.pdf

Employee Database Records

Service restrictions during October 2008

During 2008, HMRC is merging all employee records onto a single database.  This will provide HMRC staff with easier access to all employees’ pay, tax, NICs and pension information in one place.  HMRC describes this as “the biggest change to PAYE for over 20 years”.

There will be a preparatory period from 6 to 12 October.  The transfer of PAYE data will take place during the period 13 to 26 October, and processing services will be restored progressively from 27 October onwards.  Employers will be sent full details of the impact of these changes in July and will be asked to send forms and other information as early as possible before 6 October.

The following services will be restricted at times during this migration and transition period:

• for a period of a week (dates to be confirmed), the PAYE Online Returns and Forms service will not be available, although data will be able to be submitted using facilities provided within payroll software and via EDI.
• it will not be possible to make PAYE repayments, although advances can be claimed from the Accounts Offices.

When the PAYE Online Returns and Forms service is restored, it will not longer be possible to

• file P35 and P14s for the 2004/05 tax year, and
• file P9D and P11D Returns for 2007/08.

However, in-year forms P45, P46 and their variations can still be sent online (except for the one week that the PAYE Online Returns and Forms service is not available) or on paper.  The details will be stored and processed as soon as possible after 26 October.

When the transfer of the PAYE records is complete, it will not longer be possible for HMRC to issue P9 and P6 coding notices on a paper list.  Similarly, the issuing of coding notices by magnetic media is also to be stopped following the issuing of P9 notices in February 2009.  No P6 notices will be issued using magnetic media after that, starting with the P6 notices in April/May 2009 onwards.  Employers currently using these facilities are encouraged to consider the online options instead.

Further information:
Notes for Payroll Software Developers – June 2008  http://www.hmrc.gov.uk/comp/notes-11-5.pdf

PAYE Procedures

Reminders about P46 completion, duplication and payments after leaving

In the latest issue of Notes for Payroll Software Developers, the developers have been asked to take appropriate measures to encourage their clients to comply with the following PAYE procedures.

1. When new employees do not provide a form P45, a form P46 must be completed in every case, even if the employer has only partial information with which to complete it.  It should be submitted as soon as the employee has been paid for the first time and tax code BR must be used.  Not sending in the P46 is a failure to operate PAYE.
   
2. When an employee returns to work again for the same employer and a P46 is produced because not P45 is provided, some computerised systems automatically allocate the starting date from the previous period of employment.  The starting date on form P46 must be the starting date of the new employment.  Developers are asked to ensure that their systems either prevent the earlier start date being allocated or remind users that the latest commencement date must be used.
3. Some computerised payroll systems allow in-year forms to be filed online when a paper version of the form has already been submitted.  When employers start to file in-year forms online for the first times, developers are asked to ensure that no option is provided to file online forms that have already been sent on paper.  Alternatively, the system should remind users that they should not send an online form if a paper one has already been submitted.
4. When a payment is made to an employee who has left and for whom a P45 has already been issued, a second P45 should never be issued.  Details of the date, the amount of the payment and the amount of tax deducted should be provided in some other format.  Any format, other than a P45 is acceptable, e.g. a typed or handwritten note, or an email, or a note on the payslip.

Further information:
Notes for Payroll Software Developers – June 2008  http://www.hmrc.gov.uk/comp/notes-11-5.pdf

Mandatory Online Filing

Determining employer size for 2009/10

The decision on whether a PAYE scheme is to be treated as a small, medium-sized or large employer for

• electronic payments from April 2009,
• filing in-year forms online from April 2009, and
• submitting P35 and P14s for tax year 2009/10 online from April 2010

will be made on 19 October 2008, according the number of employee records for the PAYE scheme at that date.  Employers will be notified of their appropriate obligations in November 2008.

Further information:
Notes for Payroll Software Developers – June 2008  http://www.hmrc.gov.uk/comp/notes-11-5.pdf

Filing Form P46 Online

Error on HMRC’s online filing service

HMRC has advised that there is an error in the instructions given for P46 filing using the PAYE Online Return and Forms service.

The first field employers must complete asks whether the employee is an existing employee who was previously paid “below the PAYE threshold” instead of “below the Lower Earnings Limit for NICs”.  It may not be possible to correct the erroneous text before April 2009.

Further information:
Notes for Payroll Software Developers – June 2008  http://www.hmrc.gov.uk/comp/notes-11-5.pdf

Data Protection

HMRC and MOD data security breaches

Richard Thomas, the Information Commissioner, has announced that enforcement action is to be taken against HMRC and the MOD following recent serious data breaches.

He stated that the reports published on 25 June show “deplorable failures at both HMRC and MOD.  Information security and other aspects of data protection must be taken a great deal more seriously by those in charge of organisations. No chief executive can now say that data protection doesn’t matter.”

The Information Commissioner’s office is to serve formal Enforcement Notices on HMRC and the MOD. Compliance with the terms of the Notices will require HMRC and the MOD to implement all of the recommendations outlined in the reports and progress reports will be required after 12, 24 and 36 months documenting in detail how the recommendations have been, or are being, implemented to improve Data Protection compliance.  Failure to comply with an Enforcement Notice is a criminal offence.

Further information:
HMRC and MOD data security breaches  http://www.ico.gov.uk/upload/documents/pressreleases/
2008/hmrc_mod_data_security_breaches_25062008.pdf

Payroll deadlines during the next month

July 5 – This is the final day of tax month 3.  Tax and NICs etc for payments made in the tax month to July 5, or in the tax quarter to July 5, are due for payment to the Accounts Office by July 19, or by July 22 if paid electronically.

July 6 – This is the deadline date for filing, in paper form or electronically,

• form P9D Expenses payments and income from which tax cannot be deducted
• form P11D Expenses and Benefits
• form P11D(b) Return of Class 1A National Insurance contributions due and Return of expenses and benefits – Employer’s declaration

Copies of forms P9D and P11D must also be given to the employees concerned by this date.

July 18 – (July 19 is a Saturday) – This is the deadline for payment of tax and NICs to the Accounts Office, for tax month 3 by employers who pay monthly, for tax months 1 to 3 by employers who pay quarterly, unless they make their payments electronically.

July 18 – (July 19 is a Saturday) – This is the deadline for payment of Class 1A NICs to the Accounts Office in respect of benefits in kind reported by employers on forms P11D for the 2004/05 tax year, unless they make their payments electronically.

July 22 – For employers who pay their tax and NICs to the Accounts Office electronically, this is the deadline for electronic payments, including payments of Class 1A NICs to be cleared into the HMRC bank account.  Payments through BACS must be initiated by July 20 at the latest.

Payroll FAQ's

Reporting Benefits and Expenses

How are tax and NICs liabilities handled when an employee pays for a benefit and the employer pays the employee’s costs?

This question illustrates very well the issues that must be considered when deciding on the tax and NICs liabilities for many different benefits in kind.  The two key questions are:

• who has contracted with whom to provide the benefit? and
• who settles the bill?

We can use the example of private medical insurance and treatment to illustrate the issues.  The examples given below are for an employee whose private medical treatment costs, including any VAT payable, amount to £1,000.

The employer contracts with the provider
If an employer contracts with an insurance company to provide private medical insurance for employees and pays the premiums, the cost to the employer is reported in Section I of form P11D for each employee and the employer pays Class 1A NICs.  That is probably the most common situation.  Exactly the same reporting requirement would apply if the employer contracts with a private hospital to provide treatment for an employee and also pays the bill.  There is no P9D reporting requirement and no Class 1A NICs to pay if the employee is a lower-paid employee, i.e. has an earnings rate of less than £8,500.

Example: The employer reports £1,000 in Section I of form P11D and pays the appropriate amount of Class 1A NICs.  The employee will pay tax on the £1,000 by means of a tax code reduction.

But, there are two other situations to consider. 

The employee contracts with the provider and the employer pays the bill
First, if the employee arranges to have medical treatment at a private hospital, with the effect that the contract is between the employee and the hospital, and then the employer pays the hospital, the employer must report the benefit

• in Section B of form P11D, or
• if the employee is a lower-paid employees, in Section A(2) of form P9D,

and both employer and employee must pay Class 1 NICs because the employer has settled the employee’s debt (or “pecuniary liability”).

The liability for primary and secondary Class 1 NICs must be met at the time the hospital’s bill is settled by adding the amount paid by the employer to the employee’s gross pay in that same earnings period, but for NICs purposes only.

Example: The employer reports £1,000 in Section B of form P11D and the employee will pay tax on that by means of a tax code reduction.  In the earnings period in which the payment is made to the hospital, the employer (1) adds £1,000 to the employee’s gross pay for Class 1 NICs purposes only, (2) calculates and deducts primary and secondary NICs at the appropriate rates, and (3) deducts £1,000 from the employee’s net pay.

The employee contracts with the provider and the employer reimburses the costs
A different situation arises if the employee contracts with the hospital for the treatment, pays the hospital’s bill, and then claims reimbursement from the employer.  The employer is not now providing a benefit in kind, but is making a cash payment for what is otherwise a taxable benefit.  The payment cannot be paid as an expenses payment to the employee, nor is it reportable on form P11D.  Rather, the tax and Class 1 NICs must be calculated through the payroll by adding the amount to gross pay. 

Example: The employer adds £1,000 to the employee’s gross pay for both PAYE tax and Class 1 NICs.  The net amount received by the employee is, of course, considerably less than £1,000.
If, however, the employer intends to meet the employee’s costs in full, in effect by paying the tax and NICs, the amount reimbursed must be grossed up for tax and NICs.  This is an expensive option.

Example: The grossed-up amount that gives £1,000 after deducting tax and NICs depends mainly on the employee’s tax and NI status.  It could typically be over £2,000 for a higher-rate tax employee, or £1,450 for a basic-rate tax employee.  The employer adds the grossed-up amount to the employee’s gross pay for both PAYE tax and Class 1 NICs and the employee’s net pay is £1,000 more than it would otherwise be.

The same contractual and payment issues apply to most benefits in kind.  Of particular interest are benefits in kind that have no reportable value if they are provided by the employer, such as a mobile telephone, a cycle and related safety equipment, and equipment for use away from the workplace.  There is nothing to report on form P11D and no Class 1A NICs to pay.  However, if the contract for the phone, cycle etc. is between the employee and the provider, and the employer settles the employee’s bill or reimburses the employee, both types of benefit are liable to tax and NICs as discussed above.

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