4 The Future of PAYE |
74. As noted in the previous chapter, HMRC attribute
many of the difficulties facing the Department to the problems
with PAYE during 2010. This chapter examines those issues and
looks ahead to the future of PAYE.
The National Insurance and PAYE
75. PAYE is the system used to collect Income Tax
and National Insurance contributions from those individuals who
are employed and/or receive an occupational or private pension.
PAYE cannot be applied to the State pension. Taxpayers in the
PAYE system are given a tax code for each of their employments
or pension sources at the beginning of each year. Where the PAYE
system rather than self assessment is being used to collect tax
on other sources of income, the tax code will require an estimate
of those amounts. The code will also reflect the individual's
personal circumstances, such as the higher personal allowance
given to older people. The taxpayer pays tax during the year on
the basis of the code. At the end of the year there is a reconciliation
whereby the tax paid is compared to the tax due (information will
have been provided by employers, financial institutions that pay
interest etc.), adjustments are made and tax overpayments or underpayments
are made as necessary. Adjustments are most likely where there
has been a change of individual circumstances or where an individual
has multiple sources of income (for example, an income and a pension).
Before 2009, these reconciliations had to be done manually because
HMRC held its taxpayer employee details spread across 12 separate
regional databases. This required considerable manpower.
76. In June 2009 HMRC introduced a new computer system,
the new National Insurance and PAYE System (NPS). This is able
to bring information about each taxpayer together into a single
record. The NPS is able to perform the annual reconciliation process
automatically for most taxpayer cases, so that considerably less
manual intervention will be needed in the future. Unfortunately,
the introduction of the NPS was hampered by the quality of data
used to populate it and a series of incorrect coding notices was
issued in early 2010.
77. Eventually, the introduction of the NPS was delayed
by a year to ensure proper testing, so that the results of the
first large-scale PAYE reconciliation exercise did not become
apparent until autumn 2010. Because of the delay launching the
NPS, HMRC had not reconciled taxpayer records for 2008-09 in the
summer of 2009. Consequently, they had to use NPS to reconcile
both 2008-09 and 2009-10 in 2010 when it finally began to function
on live cases. In autumn 2010 it became public knowledge that
some 6 million taxpayers were likely to receive repayments or
face overpayments as a result of the reconciliation process, resulting
in considerable public concern and media criticism. There had
been no prior warning of this to the public.
78. It has since become apparent that there were
also unreconciled 'open cases' from earlier years and much of
the unpaid tax due has had to be written off.
79. We held a hearing on HMRC's handling of this
issue in September 2010 and their performance was the subject
of sustained criticism of in the Committee of Public Accounts
(PAC) report on HMRC's 2009-10 Annual Report.
The Government accepted most of the PAC's criticisms and HMRC
is committed to clear the backlog of open cases, which stood at
17.9 million in late 2010, by 2012. The National Audit Office,
in its report on HMRC's 2010-11 Accounts, notes that the Department
is ahead of its target to clear the backlog of open cases, but
also that substantial work will still be needed to stabilise the
80. The episode's impact on the reputation of HMRC
cannot be overstated. The problems with PAYE spring immediately
to mind when reading Tax Help for Older People's damning verdict
on HMRC's public profile:
Ten years ago the Inland Revenue had the reputation
of being one of the best run Departments in Whitehall. Today HMRC's
reputation is in tatters as one disaster has followed another.
81. Paul Aplin of the ICAEW was concerned about the
damage done by the incorrect coding notices to the public perception
of the tax system:
[My parents] are taxed through PAYE. They would not
have a clue if the coding was right or wrong but what they do
have, because it is a generational thing, is an absolute trust
that a Government department is going to get it right. [...] If
that fundamental trust breaks down because people start having
reason to think that PAYE is not working for them, or that perhaps
they can't telephone someone who can help them and answer their
question convincingly, I think there is a knock-on effect.
82. The fact that six million taxpayers will have
received letters telling them they have previously paid the wrong
tax following the autumn 2010 reconciliations can only have reinforced
this perception. Media reports that erroneously portrayed a process
of reconciling data as correcting 'HMRC mistakes' or 'computer
errors' will have done more damage. The PCS union told us that
the Department had considerably underestimated the impact of NPS
on HMRC's contact centres meaning people will have struggled to
obtain the advice they needed.
The Department itself has conceded that the reconciliations are
likely to have a continuing negative impact on its customer service
performance and that the negative publicity will have impacted
on staff engagement.
83. The National
Insurance and PAYE Service should ultimately make PAYE work more
effectively and ensure efficiencies across the Department. However,
the problems resulting from its flawed implementation have done
significant damage to the public perception of HMRC and the tax
system more generally. It is crucially important for the credibility
of the management team that the 2012 target for clearing open
cases is met and that improvements in overall performance follow
Reforming PAYE: Real-time Information
84. HMRC was already consulting on a possible change
to the collection of PAYE data at the time of the autumn 2010
initial consultation contained two options: Real-time Information
and Centralised Deductions. Real-time Information would allow
tax codes to be updated when employees are paid, by transmitting
information to HMRC via the Banks Automated Clearing System (BACS),
rather than reconciled at the end of the year through the submission
of forms by employers. Centralised Deductions would have been
a longer-term option, building on Real-time Information to move
responsibility for calculating and deducting Income Tax, National
Insurance and student loans away from employers to HMRC.
85. The Government decided in autumn 2010 to press
ahead with a second consultation on implementing Real-time Information.
Centralised Deductions have not been ruled out in the longer term,
but the proposal in the first consultation was controversial and
no further plans have been advanced.
86. In HMRC's remit letter, David Gauke, the Exchequer
Secretary and Minister for HMRC, stated that Real-time Information
is "crucial to the delivery of the Government's welfare reform
agenda." HMRC's Business Plan says Real-time Information
will be introduced by 2013 and a further consultation on the detailed
changes was published in December 2010. The Government's consultation
proposed that employers would provide information on gross pay,
tax and National Insurance contributions deducted in respect of
every employee to HMRC, the information would be attached to the
payment and transferred via BACS to HMRC.
87. The second consultation envisaged a test system
up and running by April 2012 with a small number of volunteers.
A further test group would be introduced in October 2012. HMRC
expects to begin mandating large employers to use RTI from January
2013, with medium and small employers following later in the year.
88. Speaking in the House on the 8 September 2010
the Exchequer Secretary described the PAYE system as "outdated,
inefficient and burdensome to the Exchequer and taxpayer alike."
Vocalink, who operate the BACS, told us that the current PAYE
system is largely a "computerised version of the original
1940s paper-based system." They told us that many of the
problems with PAYE come from the quality of information provided
to HMRC and the time-lag between that information being submitted
and being acted upon.
Stephen Banyard, the acting Director General for Personal Tax
at HMRC, admitted that for Real-time Information to work well,
data quality would have to be considerably improved. He set out
a programme of data matching with employers to attempt to 'cleanse'
the data held by HMRC. Data
quality has been a key weakness in the PAYE system to date. The
success of both the National Insurance and PAYE Service and Real-time
Information will depend to a large extent on how effectively HMRC
can 'cleanse' the data it receives and holds.
89. Our witnesses were generally supportive of Real-time
Information in principle. However, few believed that the case
for reform was as urgent as the Government initially portrayed.
The Institute of Payroll Professionals rejected the suggestion
that the PAYE system was "broken" and the Institute
for Chartered Accountants Scotland observed that "The UK
PAYE system still works remarkably well".
A common theme in the evidence from professional bodies was the
need to introduce the reform slowly, following proper testing
and only once the NPS had stabilised.
There was also scepticism as to whether the project would be delivered
within the £100 million budget set by the Government.
90. When we heard from HMRC in September 2010 Dame
Lesley Strathie described Real-time Information as "high
cost, high risk and [not] without difficulty."
Eight months later we asked how certain she was it would be delivered
on time. She said "I would be a fool to say 100% but that
is how I feel. I believe that we can do this."
We pressed Stephen Banyard, acting Director General of Personal
Tax, about whether the concerns discussed earlier about potential
problems not reaching senior managers might lead to issues arising
later in the project. He told us managers had spoken to frontline
staff and management and were confident the project would be delivered
on time. He also stressed that the reform would be introduced
more gradually than the NPS.
91. We welcome
the move to introduce Real-time Information. We agree with the
professional bodies that the system must be tested thoroughly
before full implementation, with full consultation with users
and close co-operation with the Department for Work and Pensions
at all stages. We note that large employers will be required to
use the new system in January 2013, which is before the system
has been tested through one complete tax year.
92. A particularly important point was the reminder
by the ICAEW that Real-time Information is a means of transmitting
information, not a means of processing that information.
Crucial to the success of the project will be HMRC's ability to
process the information in a timely and accurate way. The
transfer of information to HMRC via BACS is only part of the Real-time
Information project. HMRC must also be able to process the information
in a timely way, deal with the increase in customer contact that
will occur with the introduction of a new system and have in place
satisfactory arrangements for those who do not pay their employees
93. HMRC has
committed to an ambitious timescale to deliver Real-time Information,
driven in part by the importance of the project in delivering
the Universal Credit. The history of large IT projects subject
to policy-driven timescales has been littered with failure. The
timetable is made more ambitious by the fact HMRC will still be
resolving the legacy of open cases and stabilising the National
Insurance and PAYE Service during the project's early stages.
Introducing Real-time Information before HMRC and the Government
can be sure it will work correctly would run unacceptable risks
for the reputation of the Department and the tax system. We recommend
that HMRC and DWP have contingency plans in place in case a delay
becomes necessary. Given the importance of the project we further
recommend that the preparations for Real-time Information in both
HMRC and DWP are subject to external audit as implementation proceeds,
for example through the National Audit Office, to ensure that
they are as robust as possible. We expect arrangements to be put
in place for the National Audit Office to report quarterly to
Ministers, this Committee, the Public Accounts Committee and other
relevant Committees to ensure Ministers in both Departments can
be held properly accountable for the progress of the project.
79 Committee on Public Accounts, Eighteenth Report
of 2010-12 Session, Her Majesty's Revenue and Customs' 2009-10
Accounts, HC 502 Back
HMRC Annual Report and Accounts 2010-11, p. R38 Back
Ev w24 Back
Q 111 Back
Ev 83 Back
Ev 97; Q 136 Back
HMRC, Improving the Operation of Pay As You Earn, July 2010 Back
HMRC, Improving the Operation of Pay As You Earn: Real-time Information,
December 2010 Back
HC Deb, 8 September 2010, col. 325 Back
Ev w25-w26 Back
Ev w2-w3; Ev w13 Back
See for example Ev 79; Ev w20-21 Back
Ev w29; Ev 86 Back
Oral Evidence taken before the Treasury Committee, HMRC's Operation
of the PAYE System, 15 September 2010, Q 114 Back
Q 321 Back
Q 324 Back
Ev 77 Back