|This Saturday will see the biggest overhaul to the Pay As You Earn (PAYE) system of income tax since its introduction nearly 70 years ago. Employers will no longer be able to wait until the end of the year before telling the taxman how much they have paid their staff, but must do so whenever a payment is made.
PAYE has gone largely unreformed since its introduction in 1944 by the wartime chancellor Sir Kingsley Wood, who dropped dead on the day it was announced in the House of Commons. The big assumption then, and for many years after, was that people would stay with the same employer for life. Today, people move jobs much more frequently and HMRC has found it increasingly hard to keep up with what they earn. So complicated has the coding become that around 1.4 million people were sent tax demands totalling £3.8 billion in 2010/11 that resulted from problems with the PAYE system.
The Real Time Information (RTI) reform is intended to prevent a repeat of that fiasco by eliminating tax code errors and, also, to support the introduction of the new Universal Credit by linking up the tax and benefit systems. HM Revenue & Customs (HMRC) claims that firms will save £300 million a year in administration costs. However, this is not the expectation of thousands of employers who need to invest in new payroll software or update their current systems. This may be straightforward enough for a big company, but it is a costly burden on a small business at a difficult economic time. Moreover, a survey this week suggested that one in five such companies is unprepared for the change and, in some cases, unaware it is even happening. They risk fines for incorrect or late returns.
Inevitably, with a measure of this magnitude there will be teething problems; but Whitehall’s record of IT project disasters does not fill us with confidence that this major reform will be handled well. Commendably, HMRC has shown some flexibility by allowing firms with fewer than 50 employees to file a PAYE return just once a month until October, after which they will be required to provide real time information on every payment made to an employee.
On October 6, Universal Credit will start; and it is hard not to conclude that this timetable is being dictated by unrealistic ministerial expectations and politically driven policy deadlines rather than by what works. RTI may turn out to be a benign reform, though, tellingly, no other advanced economy has tried it. But in the short term, it could damage small businesses just when their entrepreneurial zeal is needed most to create new jobs and revive the economy. Ministers have a duty to get it right.