HC 576 Progress towards the implementation of Universal Credit

Written evidence submitted by the Institute of Chartered Accountants for England and Wales

INTRODUCTION

1. Institute of Chartered Accountants for England and Wales (ICAEW) is writing to provide written evidence in response to the call for evidence on 17 July 2012 by the Work and Pensions Committee on progress towards implementation of Universal Credit (UC).

2. In its call for evidence, the Committee listed eight areas on which it welcomed comments. ICAEW’s submission focuses on two of these areas: the potential impact on the self-employed and small businesses and the Real Time Information (RTI) computer system HMRC will use to administrate UC.

WHO WE ARE

3. ICAEW is a world-leading professional accountancy body, supporting over 138,000 Chartered Accountants in more than 160 countries. Our members operate across a wide range of sectors in business, practice and the public sector.

4. ICAEW’s Royal Charter means that we work in the public interest with governments regulators and industry to maintain the highest business and ethical standards.

GENERAL COMMENTS

5. The Government’s proposals for UC are a fundamental and far-reaching reform of the benefit system. As noted in the Committee’s call for evidence, the Government’s policy objectives are to:

· improve work incentives;

· smooth the transitions into and out of work;

· simplify the benefits system;

· reduce in-work poverty; and

· reduce fraud and error.

6. We believe that there is a reasonable consensus that the existing benefit system is in need of reform and in principle the above are laudable policy objectives. The existing rules are highly complicated to understand, apply and administer, they create many anomalies and perverse incentives and appear prone to fraud and error.

7. In principle, therefore, UC offers an opportunity to tackle these problems. The key test is whether the design and implementation of UC can deliver benefits in all these areas. As chartered accountants and business advisers, our particular areas of expertise in this area are:

· the interaction of UC with self employed/small businesses; and

· progress with the IT system that will underpin UC claims, namely HMRC’s Real Time Information. The latter will affect all businesses that have employees.

8. Our key concerns highlighted below are that the proposed implementation of UC in these two areas may not realise the policy objectives. In particular an emerging concern is that the proposals in these two areas are likely to be highly complicated and administratively much more burdensome on businesses than the existing rules.

the potential impact on the self-employed/small businesses

9. We are concerned about the proposals for implementing UC for the self employed and small businesses. As it stands at the moment, the proposals will impose significantly increased burdens on this sector which conflict with the policy objective to simplify the system. We have a number of detailed concerns about the impact on small businesses. Given the committee’s request to keep submissions to no more than 3,000 words, we have summarised our concerns below.

· Currently the self employed claiming benefits such as tax credits submit a yearly return of income. Under UC, they will need to submit a monthly return of income. The administrative burden on the self-employed and small business owners claiming benefits will therefore increase by a factor of twelve.

· The monthly return must be submitted within seven days of the end of each month, otherwise UC payments will be suspended. That is a very short time in which to pull together the right paperwork while running your own business.

· Businesses can only report online. Clearly it is right that in the longer term the UK and its citizens should embrace a digital future. However, it is wrong to have this imposed on those who are not ready, particularly as many of the citizens claiming UC may be vulnerable and need more support. Recent data shows one in ten businesses don’t use the internet. Many more (particularly in rural areas) cannot access broadband at reasonable speeds. Another recent report stated that 7.8 million adults in the UK (more than 10% of the population) have never used the internet. These people will struggle to make a claim, either because they will not have the equipment and/or the necessary competence. Further, many questions remain about Internet security, so UC claimants are unlikely to wish to report sensitive financial information on a public computer in, say, a library.

· Self employed claimants could be asked to report in two different ways by two different parts of government. To claim UC, DWP proposes everyone to submit monthly reports using cash-based accounting (where receipts and expenses are recorded during the period they are actually received and paid) rather than accruals accounting. We have highlighted below our concern about the proposal to use cash accounting. Leaving this aside, adoption of cash accounting is potentially in conflict with the tax rules which are based on accrual accounting, although HMRC is currently consulting on whether small businesses could opt to submit tax returns based on cash accounting. Unless reporting for UC and tax are joined up properly and on a consistent basis, there is a risk that some small businesses will, have to prepare two totally different kinds of account, causing confusion and an increase in admin burdens.

· The proposal to use cash accounting for UC needs to be rethought. Cash accounting offers a distorted view of people’s income. A self-employed retailer might buy in stock in January and show a big drop in income, but sell it in February, showing a spike in income. Their monthly UC payments will not reflect their actual financial circumstances, so may distort income flows rather than supporting those on low incomes.

· We are concerned that DWP is forging ahead with cash accounting for UC when other parts of Government are (rightly) cautious about its adoption. The Office for Tax Simplification considered that it should only be offered to cash-based businesses with a turnover below £30,000, and HMRC are considering it with great caution. It is important that DWP does not make a premature decision on cash accounting without proper consideration of the knock-on implications elsewhere.

· UC’s rules will hit those trying to move from welfare to work using self-employment as a stepping stone. Under the ‘gainful self-employment’ rule, recipients won’t be able to be employed part-time while building up their own business. That’s because UC rules require claimants to be working at their self-employment for at least half the expected number of working hours for the system to realise that self-employment. Otherwise, they’ll need to agree to find other work.

· The IT system UC will rely on will not be fully implemented in time, and many kinks and problems in the system haven’t yet been addressed (more detail follows in direct response to the committee’s questions on RTI).

10. Should the committee be interested, we can on request provide more detail on the points set out above.

11. In the light of the above concerns, we have recommended the following to the DWP:

· Revise the reporting process to give the self-employed more time to prepare and report their information.

· Provide alternative ways to submit information, for example telephone or postal submissions.

· Consider an alternative system for UC claims by business claimants, based on the current tax credits model. This will allow businesses that already use GAAP-based accounts and income tax rules to use them for UC claims too.

REAL TIME INFORMATION

12. The design of UC is underpinned by RTI for PAYE taxation being developed by HM Revenue & Customs. Under RTI, employers will submit monthly data electronically to HMRC of employee earnings, tax and NIC paid etc. HMRC will then forward data to DWP which will be used to validate any UC claim.

13. It is important to appreciate that RTI is a major extension of the existing PAYE reporting system which HMRC is implementing for a variety of reasons of which UC is only one aspect. It will provide detailed information to HMRC monthly in respect of all employees, whether or not the employees make a UC claim. The RTI data will then be passed to the DWP through a gateway and this information will then be used by DWP to validate UC claims. However, our intelligence is that the gateway has not yet been built, so at this stage we do not know what information will be submitted over the gateway to the DWP and how it will be used by the DWP to validate UC claims.

14. The Committee has asked for comments on RTI and following discussions with the Committee clerk a number of specific questions have been identified. We have set out these questions and our comments below. However, we have a number of concerns about RTI and the extra burdens that it will impose on businesses.

Answers to the Committee’s specific questions on RTI

What issues have been identified so far during the RTI pilot and how are these being resolved? It has been suggested that only a small percentage of records have been successfully matched during the pilot – is that the case and if so what is the problem and how is it being resolved?

15. We do not have this information, and suggest you ask HMRC for clarification. Clearly, for RTI to support UC it is essential that data is accurately matched. This will involve HMRC matching the data to payment and its own standing data, the successful transmission through the gateway and the DWP then matching that data to a UC claim. In principle this should streamline admin and provide a joined up service. However, there a number of processes involved and given the short timescale and lack of detailed information about the precise IT solutions, the scope for problems arising looks considerable.

Is the objective of getting all employers on to RTI by October 2013 still achievable?

16. Given that RTI is a significant increase in admin existing burdens and will apply to all employers, the timetable appears challenging. We assume that HMRC will be able by that date to notify all employers that they must submit RTI but in practice we expect many smaller businesses to struggle tom comply, especially those who are not computer literate or are in areas where broadband connectivity is poor.

Employers have indicated that the migration is too rapid – what response has been made to their concerns?

17. As far as we know, HMRC has not responded to those concerns. We think many employers do not know that they must migrate to RTI between April and October next year. We expect that HMRC are well aware of the scale of the challenge of alerting and educating employers, both before the changeover and to support employers afterwards. We have been doing our best to raise our members’ awareness of the deadline and are currently working with HMRC on a webinar scheduled for transmission next month. Many employers would prefer mandation from 6 April, to coincide with the start of the payroll year, but for many businesses 6 April 2013 would be too soon, so there is a case for putting the date back to 6 April 2014.

All businesses will have to conduct a data checking and collection exercise to verify their employee details before their first RTI submission. HMRC is also conducting a data cleansing exercise of its PAYE records. What support will be available to resolve initial data verification problems, especially as the number of new employers joining RTI increases significantly?

18. Employers who have submitted their initial cleansed data to HMRC tell us that the flow of data is only one-way – i.e. HMRC isn’t feeding data back to employers to help them to correct their records.

Software suppliers have indicated that there is insufficient time to develop the required new products – how is this being resolved?

19. Software houses have also told us that HMRC have taken longer than expected to provide software specifications, which has delayed software writing.

It has been suggested that the pilot has provided insufficient opportunity to test the at-or-before issue because ad hoc payments are permitted without the requirement to submit a Full Payment Submission (FPS ) – how and at what stage will the at-or-before issue be tested [1] ?

20. We have also asked HMRC about this, and recommend you ask them to respond. The pilot is at an early stage, and we suspect employers have not yet had to face up to the complicated aspects of RTI, for example the on-or-before deadlines included in our list of examples (appendix 2, page 15) of when employers will find it impossible or impractical to meet the deadline for making the Full Payment Submission (i.e. submitting the RTI report).

Is the Interim Solution accurate enough for Universal Credit?

21. Yes, it is probably sufficiently accurate, especially as it will be corroborated by input from claimants.

Can it guarantee real time accurate data?

22. It is not possible to guarantee 100% accurate real time data, but it is probably sufficiently accurate when corroborated by input from claimants.

What is likely to be the impact on the delivery of the Universal Credit system of RTI initially being delivered via the Interim Solution rather than the Strategic Solution?

23. The main impact is that RTI can be implemented on schedule even though most employers do not initiate payments by BACS [2] because it’s more costly. If the strategic solution had been imposed on employers from day one, most employers would not have been able to comply.

Is there a greater chance that earnings data will be inaccurate?

24. We understand that the BACs solution matches the data submission with payment whereas the interim solution does not do so. There must therefore be a greater chance that earnings data under the interim solution will be inaccurate.

Could there therefore be a greater number of over and underpayments and subsequent adjustments in benefit payments?

25. Yes.

Could there be delays in earnings information reaching DWP if HMRC data matching takes longer than planned?

26. Yes.

Lord Freud has said that Universal Credit will be able to function if necessary without RTI, through self-reporting of earnings by claimants.

How would self-reporting operate in practice, both for online and for telephone claims? (Who would claimants ring to report their monthly earnings? Who would enter this data online? How would telephone claimants check the monthly earnings figures actually used to calculate their benefits?)

27. In principle this would appear possible, although we would have expected that the extra admin costs will be considerable and would negate one of the key policy drivers behind UC and RTI. We suggest it is taken up with the DWP.

What contingency plans does DWP have for running UC without RTI?

28. We do not know and suggest you take it up with the DWP. As noted above, we believe that UC can be operated without RTI, as claimants will need to claim UC and will continue to receive payslips etc against which data could be checked. It would appear sensible risk management on the part of DWP to ensure that the system can function if there are problems with RTI. However, the potential benefits of a streamlined and joined up service would be lost.

What additional resources would DWP need to run self-reporting if RTI were not available (for example how many staff to provide extra telephone services and to enter monthly earnings data for claimants)?

29. We are not in a position to answer this question and suggest you ask the DWP directly. Much will depend upon exactly how UC claims will be made and how the DWP intends to use the RTI data sent via the gateway to validate UC returns.

30. It is important to remember that RTI is being rolled out by HMRC independently of UC, so RTI is likely to be required regardless of how the data will be used, if at all, to check UC claims. That being the case, we believe that the Government has seriously underestimated the costs to employers and agents of implementing RTI, and that the extra burdens on many small businesses will be substantial. We do not know the costs incurred by of HMRC to implement and administer RTI but we suspect they are also substantial and should be clarified with HMRC.

How will ad hoc payments such as annual bonuses and benefits in kind be treated under RTI? How will UC payments be adjusted?

31. RTI is a fundamental change in the way that payroll information is reported to HMRC. However, RTI will not change the way earning are treated for tax, national insurance or PAYE. That includes annual bonuses and benefits in kind, which will be treated the same way they are now. Benefits in kind will continue to be reportable on forms P11D and, where they are payrolled voluntarily by employers, will be shown in a separate field on the RTI Full Payment Submission so that they can be distinguished from those earnings that employers are obliged to subject to PAYE.

What information assurance training will be provided to staff handling earnings data?

32. Individual government departments and individual employers will have to determine this.

How will data security work in practice, especially for those claimants using computers in public places to enter their monthly earnings data?

33. As noted earlier this is likely to be could be a major problem, particularly for the digitally excluded, those without a decent broadband connection, and those whose business doesn’t require internet access.

17 August 2012

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[1] APPG report para 158

[2] While electronic payments are transmitted through the banking system via BACS and most employees receive their salaries/wages via BACS, most employers do not initiate BACS payments. P ayments set up using internet or telephone banking, whilst paid via BACS, are not BACS payments as defined for the purpose of the strategic solution , because they are not initiated under BACS using a Service User Number (SUN), the unique six digit number allocated to organisations authorised to use the BACS service .