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PwC Warns Of UK PAYE Overhaul 'Perfect Storm'

by Robert Lee,, London

11 January 2012

While reform of the UK's pay-as-you-earn (PAYE) tax system is in itself a good thing, a tight timescale for completion could create major issues for employers, PwC has warned.

In its response to the government's consultation on draft legislation for HM Revenue and Customs's (HMRC) move to Real Time Information, PwC welcomes the modernization of the 1940s PAYE model. It says that, in the long-term, changes should help to prevent the tax code errors which have affected many people.

A series of problems have dogged the PAYE system, and in October it was revealed that over seven million taxpayers were incorrectly taxed over a five-year period, leading to HMRC paying rebates to the tune of GBP2.5bn (USD3.9bn). In 2010, HMRC was also forced to apologise for failings in the system, which led to 1.4m taxpayers being undercharged an average of GBP1,428 each, while 4.3m workers were overcharged from March 2008-April 2010, with the government paying out GBP1.8bn in that instance.

PwC warns that radical change to the way employers and HMRC handle payslip data is fast approaching. As it points out, from October, 2013 all employers must use the new system, which will mean that payslip data on tax, National Insurance contributions (NICs) and other deductions will be transmitted to HMRC at the time employees are paid, rather than once a year. P45s, the forms on which the information is currently supplied, and many other such forms will therefore become a thing of the past.

The government is also in the process of overhauling the social security system. It is to introduce universal tax credits in October, 2013, and hopes that, by providing the Department of Work and Pensions with up-to-date accurate information about an individual's earnings, it will be able to reduce error in the payment of benefits.

While PwC welcomes these changes, it warns that the tight timescale in place could cause major issues for employers and make glitches likely when the new system is first introduced. John Harding, tax director at PwC, commented: "The modernization of PAYE is long overdue. The system dates back to the end of the second world war when most people had one job, often for life, and were paid in cash. Given complex working patterns today it's surprising it's coped as well as it has. However, we could well be heading for a perfect storm given the scale and timing for change. Real Time Information will see employers gathering and transmitting considerable volumes of data, beyond what is already on the payroll system."

"Timescales are incredibly tight for getting the processes in place across the many parties involved, let alone training and communications. All this will be happening when many employers will be grappling with the challenges automatic pension scheme enrolment presents. Yet the launch of Universal Credits means there's no leeway on timing. There is likely to be a level of confusion among employees as they get used to 'leavers statements', which will replace P45s. However, few are likely to be sorry to say goodbye to the dreaded P45," Harding concluded.

TAGS: tax | business | employees | United Kingdom | payroll | tax credits | small and medium-sized enterprises (SME) | social security | tax reform | individual income tax

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