HRD & Payroll Solutions Newsletter

In our recent newsletter, we indicated that the removal of the 10% Starting Rate and the reduction in the Basic Rate to 20% would be effective from 6 April 2008 but would not be introduced until week 7 of the new tax year, i.e. on the payday falling on or after 18 May. This has been the normal implementation date over the past few years, varying only when the date of the annual Budget has been too late for HMRC to meet that deadline.

This normal arrangement has been queried by some payroll system developers following publication by HMRC of revised Specification for PAYE Tax Table Routines. These specifications, in Schedule A, indicate that payroll systems should introduce the changes from the start of the 2008/09 tax year.

After querying this with HMRC, one developer received the following reply:
“The announcement by Gordon Brown (in his capacity of Chancellor of the Exchequer) at the 2007 Budget is just an announcement of intent by a Government Minister. There is currently no legislative cover for any changes to tax deduction from 6 April.
If this is brought in we will have a 10% rate band against nil income for PAYE (Important to stress that the 10% still remains, but it just doesn’t apply to PAYE income). The 22% basic rate will be reduce to 20%, and the 40% band will stay at 40%. The tax band widths have not been announced so we are staying with 20% up to 34600, 40% above 34600.”

The absence of any statutory basis for the tax rate and threshold changes until the annual Budget appeared to suggest that the normal process would be followed and payroll systems would be updated from week 7 of the new tax year. We therefore sent our own query to HMRC about the apparently contradictory instructions given in the technical specification.

The reply from HMRC makes it clear that the new structure is to be applied in full from 6 April 2008 – not from week 7 of the new tax year. The text of HMRC’s reply is as follows:

“Employers and pension providers should apply the new structure and rates of income tax for 2008-09 through their PAYE systems from 6 April 2008.
HMRC issue a new Employers’ PAYE pack, including new PAYE tax tables around 17 or 18 May after the start of the tax year. That timing causes no problems for employees’ pay or employers’ payrolls by way of a large tax deduction or reduction because generally we do not anticipate that Parliament will change the rates of income tax.

The situation for 2008-09 is a little out of the ordinary, because the Chancellor announced the removal of the 10% rate for earnings and pensions and the reduction in the basic rate to 20% at Budget 2007. Broadly speaking, the Chancellor announces that sort of thing at the Budget immediately preceding the start of the tax year. But unless the 2008-09 changes are applied by employers and pension providers from 6 April 2008, it could result in a large deduction of tax from an employer’s/pensioner’s pay in May. So, in the reasonable expectation that Parliament will enact the Chancellor’s announcements, HMRC is asking employers and pension providers to operate the new structure and rates through their PAYE systems from 6 April 2008.

On our legislative cover, income tax is an annual tax which is re-imposed each year by Parliament through the Finance Act. The Finance Act usually receives Royal Assent in July following the start of the tax year. But a key feature of the tax system is that measures announced at Budget can have effect before the Finance Bill is enacted. The Provisional Collection of Taxes Act authorises the imposition of taxes or changes in their rates until the Finance Act receives Royal assent. It does that by authorising the Budget resolutions which the Chancellor tables as soon as he has finished his Budget speech.

Given the announcements at Budget 2007 and confirmed at the recent Pre-Budget Report, we anticipate that the Chancellor’s Budget 2008 resolutions will include that the 10% rate will no longer apply to earnings and pensions and there will be two main rates of income tax as noted above.

On the rate band widths, there is a statutory provision that they are increased each year by indexation. In the usual way, we will make an Order at Budget 2008 to confirm the rate band widths. Of course, it is open to Parliament to change the rate band widths as it sees fit. For 2008-09, the Chancellor has made no announcement about doing anything other than increasing the rate bands widths by indexation.”

The effect, therefore, is that the new structure will be introduced from 6 April 2008, but using the existing basic rate threshold. The increase in the threshold, from £34,600 to £36,000, will apply from week 7 if it is confirmed by the Chancellor in the Budget.
The change in structure from 6 April 2008, expressed in payroll terms, is:

2007/08		2008/09
Tax Rates	Taxable Pay Bands	Tax Rates	Taxable Pay Bands
Starting rate, 10%	£0 - £2,230	-	-
Basic rate, 22%	£2,230 - £34,600	Basic rate, 20%	£0 - £34,600
Higher rate, 40%	Over £34,600	Higher rate, 40%	Over £34,600

In practical terms, however, as defined in the Specification for PAYE Tax Table Routines, computerised payroll systems will retain the starting rate band but define it as having a nil bandwidth, as follows:

2008/09, effective 6/4/08
Tax Rates	Taxable Pay Bands	Band Width
1st rate, 10.00%	£0 - £0	£0
2nd rate, 20.00%	£0 - £34,600	£34,600
3rd rate, 40.00%	Over £34,600	-

EU Services Directive

Consultation period on implementing the Directive in the UK

The objective of the European Union (EU) Services Directive is to develop a single European-wide market in the services sector by breaking down barriers to cross-border trade with the EU. It aims to make it easier for businesses to set up in another Member State or to provide services across borders or on a temporary basis.
The UK has until 28 December 2009 to bring into force any new national laws, regulations or administrative processes needed to comply with the Directive. Consultation on implementing the Directive in the UK began on 5 November and will close on 11 February 2008. It is being overseen by the Department for Business Enterprise and Regulatory Reform (DBERR).

The Directive requires each Member State to set up a point (or points) of single contact (PSC) to allow users to find out about relevant rules and procedures should they wish do business in that Member State, and to apply remotely for any necessary licences or authorisations. The PSC in the UK will be intended primarily for service providers established in other Member States, as well as service recipients in other Member States.

In setting out the options for implementing the Directive in the UK, the consultation document proposes a middle course between extremes. At one extreme, a basic PSC could simply signpost users to other websites that have relevant information. This option would be relatively inexpensive and simple to set up but it would likely not deliver all the potential benefits of the PSC. At the other extreme, a comprehensive decision-making service, whereby all necessary processes, assessments and advice are provided and supported by a single site, would replicate responsibilities of competent authorities, be overly complicated and expensive to build, and would increase the risks of the PSC not being operational by the implementation deadline. The Government therefore proposes to establish a mid-range system based on “proactive and helpful” signposting, which it believes will meet the requirements of the Directive and avoid unnecessary complication. It would form a part of the Government’s existing Business Link website although the exact way this would be done has yet to be investigated.

Curiously, the Directive does not require the PSC to provide information on taxation and employment law. However, the Government proposes to provide information in these areas as well. Over 60 questions are raised in the consultation document and they include:

Do you agree that, regardless of the scope of the Directive, the UK PSC should attempt to signpost useful information, for example taxation and labour law?

Which are the most important pieces of information necessary for service providers to do business in the UK, specifying up to five?

Full details on how and by when to submit responses are provided in the consultation document.

Further information:
Consultation on implementing the EU Services Directive http://www.dti.gov.uk/consultations/page42211.html

Double Taxation Convention

Protocol on Agreement with New Zealand

A Protocol to the Double Taxation Agreement between the United Kingdom and New Zealand was signed in London on 7 November 2007. It deals with the exchange of information between the two countries and requests for assistance. The protocol will enter into force once both countries have notified each other of having completed their legislative procedures.

Further information:
Amended Double Taxation Convention: New Zealand http://www.gnn.gov.uk/Content/Detail.asp?ReleaseID=328752&NewsAreaID=2
Protocol to the UK/New Zealand Double Taxation Convention http://www.hmrc.gov.uk/international/new-zealand.pdf

Electronic Filing

Record employer submissions for 2006/07 year end

HMRC announced detailed figures for the 2006/07 end of year online filing at a recent meeting with PAYE system developers.

Over 1.4 million submissions containing 56 million P14s were received through the online filing channel, made up of:

1.2 million submissions containing 26 million P14s from 296 internet products,

The majority of responses were sent back to the submitter within one minute.
The total error rate was down to 3.8% from 5% for 2005/06 and 13% for 2004/2005.

November 19 – For employers required to pay tax and NICs etc to the Accounts Office monthly, this is the deadline for payment to be received by the Accounts Office, unless made electronically.

November 22 – For employers required to pay tax and NICs to the Accounts Office monthly, this is the deadline for electronic payments to be cleared into the HMRC bank account. Payments through BACS must be initiated by November 20 at the latest.

Payroll FAQ's

PAYE Procedures for Part-time Employees

How are tax and NICs handled for part-time workers?

Part-time workers must be treated as all other regular employees. They should be asked for a P45 when they start and, if they cannot provide one, the P46 procedures must be followed. However, one administrative concession applies which, if used, requires the employer to follow a special procedure at the year end.

If a part-time employee provides a form P45, even if it is not current, a payroll record must be created on a P11 Deductions Working Sheet or on a computerised payroll system. The appropriate tax code is determined using normal P45 procedures.
If no P45 is provided, the employee must be asked to complete a form P46 and, other than in one specific situation, a payroll record must be created and the appropriate tax code applied using normal P46 procedures.

The exceptional situation occurs where the employee’s gross pay is less than the NICs lower earnings limit (LEL) (i.e. £87 per week or £377 per month for 2007/08, £90 per week or £390 per month for 2008/09, or the equivalent for other earnings periods). For as long as the employee’s gross pay continues to be less than the LEL for the earnings period, the employer is not required to create a payroll record. Instead, a simple record must be kept of the employee’s name, address and earnings in each earnings period. The completed P46 is retained by the employer.
If, in any subsequent earnings period, the employee’s earnings equal or exceed the LEL, a payroll record must be created and the earnings already paid must be transferred to the payroll record. The employee should be paid using the tax code identified by the retained P46 or using code NI if the earnings are not more than the NICs earnings threshold (ET) (i.e. £100 per week or £435 per month for 2007/08, or £105 per week or £453 per month for 2008/09, or the equivalent for other earnings periods). (Code ‘NI’ is not a tax code and is used for manual recording on form P11 only. Most computerised systems use the tax code ‘NT’ in this situation.) As soon as the employee has been paid, the P46 must be sent to the employer’s tax office. All payments in subsequent weeks must be paid through the payroll, even if the payments revert to below the LEL.

If, when the year end arrives, the employee is still earning below the LEL and the employer still holds the P46, no P14 End of Year Summary is required. The employer must, instead, complete a P38A Employer’s Supplementary Return. Unless the form is to be used for reporting other workers for whom no P14s are being completed, the employer has simply to sign the declaration on the front of the form, i.e.
“I declare that for each worker for whom I have not completed a form P14 End of Year Summary or a form P38(S) Student employees

I hold a form P46, that has been completed at either Statement A or Statement B by

Many employers with computerised payroll systems find it safer and simpler to put all part-time workers on the payroll, irrespective of their earnings. This is acceptable to HMRC. Handling the pay of part-time employees in this way removes the risk of forgetting to create a payroll record and submitting the P46 when earnings exceed the LEL. At the year end, a P14 End of Year Summary may be produced, even though there are no tax and NICs to report, and it is, as a result, unnecessary to complete a P38A Employer’s Supplementary Return.

REPUBLIC OF IRELAND

Form P35L Employee Listing

Guidance on reporting Medical Insurance

Form P35L is the list on which the employer makes the year-end return of PAYE and PRSI particulars in respect of each employee. Tax relief on medical insurance is normally granted at source on all premiums. Where an employer pays medical insurance as Benefit-in-Kind, the employer pays the lower premium and repays the tax credit to Revenue through the Corporation Tax return/payment. The employee, whose medical insurance has been paid by the employer, must then claim the tax credit individually.

On the 2007 P35L there is an additional field for ‘Medical Insurance Paid by Employer’. Employers are required to enter the amount of Medical Insurance contributed for each individual employee. If no contributions have been made for particular employees, this field is left blank. While employees are taxed on Medical Insurance BIK, they are entitled to the corresponding tax credit. From the information received on the P35L, Revenue can apply the credit to the individual where it has not already been claimed.

Further information:

Tax Rates and Thresholds

Implementation date for the 2008/09 changes