Small businesses struggling with RTI

HMRC keen to learn why PAYE errors occur

Real Time Information (RTI) has been an integral part of the PAYE landscape now for over 3 years although the rules were relaxed for micro-employers, ie those with up to 9 employees, until April of this year.

As one might expect with the introduction of any new system and procedures, there have been teething problems amongst employers but HMRC want to know what are the causes behind those small businesses making RTI errors and how they can help those employers to comply with their PAYE reporting requirements. To help them understand these issues, the Revenue commissioned a research study of those micro-employers and their agents, who had been known to have received a PAYE late filing penalty and those had made an amendment after the end of the tax year by submitting an Earlier Year Update (EYU).

All those who took part in the study had relatively simple payroll arrangements and for those that managed their own payroll and PAYE, a minority were described as either:

1. Knowledgeable and engaged, typically self-taught and keen to learn.

2. Struggling to cope – not comfortable with their PAYE obligations and oblivious to the fact they were doing anything wrong.

3. Getting by with rote learning.

Key findings

PAYE management not integrated

Those employers interviewed did not integrate PAYE management into the payroll process. Rather than viewing this is a logical stage-by-stage process, most viewed submitting RTI returns and PAYE obligations as being divorced from each other and being a set of discrete and dissociated tasks.

Employers tended to be focused on making payments on time to staff and HMRC rather than keeping on top of ‘the paperwork’.

Lack of understanding

One of the main reasons employers made errors was due to a lack of understanding. However, even amongst agents there are some parts of the RTI process that cause confusion.

Technical understanding of PAYE is limited to a basic ‘need to know’ basis.

Few made use of HMRC education or support materials which were considered to be difficult to navigate and understand. Instead, many adopt an approach of learning ‘on the job’ and trial and error. Technical terminology used by HMRC is rarely used and/or understood by employers.

Dates

Dates and deadlines are the main cause of error and present the main challenges to employers and their agents. Many businesses confuse and combine HMRC deadlines, ie 5th (end of tax month) or 19th/22nd (deadlines for payment to HMRC) as the Full Payment Submission (FPS) deadline. This misunderstanding can be exacerbated by unfamiliarity with technical language as many are not even familiar with the term FPS. This then makes it harder for them to make sense of their obligations around different dates.

Good practice

Examples of good practice exist, typically when running the payroll and all associated tasks are strictly managed and RTI reporting duties are integrated into the payroll process, ie systematically collecting and recording information, scheduling payroll processing and having quality checks in place.

Insufficient checking and low prioritisation

Micro-employers’ and agents’ misunderstanding of RTI reporting is made worse by their own behaviours, ie insufficient checking and not prioritising tasks, which then lead to errors in RTI submissions.

Outside influences

Some RTI reporting errors are down to factors outside an employer’s control, such as software problems that cause late FPS reporting or difficulties in getting help from HMRC, and these add to the opportunity for error.

Interviewees, whose businesses employed between 4-9 staff and kept their payroll in-house told the researchers of problems they had encountered when seeking assistance from HMRC:

“I never want to ring them [HMRC] again because it was a nightmare getting through. They just play automated messages.”

“It was just constantly on hold. So in the end, I had to get my accountant to write a letter…..basically asking what I’m doing wrong, explaining that we cannot get in touch.”

Snowball effect

A combination of poor understanding and lack of capacity can cause errors to easily escalate from a single issue that should be easily remedied to an avalanche of problems that employers lose control over.

Penalties

Whilst penalties can influence behaviour their impact is currently limited by a lack of understanding as to why the penalty was issued and a lack of explanation about the way they are implemented and enforced.

Information sources

There is no shortage of information available to employers to help them understand their RTI obligations but the investment, in terms of time spent self-educating or actual money paid to an advisor or for payroll software, is a stumbling block to those where time and money is in short supply.

What to do

There are two issues for HMRC to address:

1. Focus on better rather than more support, specifically in providing more accessible resources, such as a road-map to guide micro-employers through the process, highlighting the key requirements to be aware of, with links to the relevant detailed information that currently exists and a summary of important dates to remember.

2. Give clarity and consistency to penalties. Awareness should be raised as to the causes of penalties by including more detailed information in the penalty notice itself or signposting to a diagnostic tool to help employers self-identify the cause of the error.

The full research report, ‘Managing PAYE in real time: challenges faced by micro-employers’ can be found here.