HMRC Mulls Radical PAYE Reform

by Robert Lee, Tax-News.com, London

23 September 2010

The UK tax authority, HM Revenue and Customs (HMRC), is considering radical proposals to centralize the pay-as-you-earn (PAYE) tax payment system in order to iron out a number of errors which have beset the antiquated system for a number of years.

A discussion paper which is due to conclude on September 23 suggests a move to a 'Real Time Information' system whereby employers would report employee payment along with income tax and national insurance (NIC) deductions at the time of payment, instead of once a year as is currently the case. This, according to HMRC, would enable it to calculate the right amount of individual tax "in almost all situations" and would "significantly reduce error and confusion caused by tax codes."

The changes are being considered against a backdrop of mounting anger against the department after it was discovered that millions of taxpayers had either underpaid or overpaid tax for a two-year period following HMRC's annual reconciliation exercise.

PAYE requires employers to calculate and deduct tax and national insurance from the payments they make to their employees. The tax and NIC is paid over to HMRC shortly afterwards. But the business processes behind PAYE have remained unchanged for 66 years. The discussion document, launched earlier in the summer, explores whether there are alternative ways of collecting information that would reduce administration costs and provide a foundation for further change.

"PAYE works well for the majority of people, particularly those with stable circumstances, but because the processes remain fundamentally unchanged since they were introduced in 1944 there are some limitations," the document states. "For example, where people have more than one concurrent job or pension, or have volatile employment patterns this can mean that people may not pay the correct tax during the year and intervention from HMRC after the end of the tax year may be necessary in some cases to correct this. Some of these limitations have been demonstrated in the levels of overpayments and underpayments over recent years."

HMRC believes that 'Real Time Information' would "significantly improve the tax and welfare systems." However, it has also suggested a far more radical option to ensure the system is administered more accurately which would effectively see employers transfer employees' pay into a 'central calculator' which would then deduct the right amount of tax before releasing the employee's pay directly into their bank account.

HMRC estimates that this would save employers about GBP500m annually as they would no longer be responsible for tax, national insurance and student loan deductions. But the 'central deductions' proposal has, unsurprisingly, provoked an outcry from taxpayer campaigners and some tax experts over taxpayer privacy and data security.

"If HMRC has direct access to employees' bank accounts and makes a mistake, people are going to feel very exposed and vulnerable," George Bull, head of tax at Baker Tilly, told CNBC.

The sheer cost of constructing the system, coupled with HMRC's recent poor track record when it comes to handling new IT projects, are other major concerns.

HMRC insists, however, that "at no stage" would or its agents "have direct access to any money or information contained in the recipient’s bank account or indeed the bank account itself."

"The system would adhere to the high standards of taxpayer confidentiality that characterize the existing system," the document states.

The tax department also assures taxpayers that the discussion draft is merely "intended to start a discussion about the future of PAYE" and does not reflect government policy.

HMRC said that if it is decided to proceed with the collection of real time information on PAYE deductions, it is expected that the next stage of consultation will begin in the Autumn.

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