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PAYE reforms ‘merit further exploration’
by Susie Hughes at 09:33 06/10/10 (News on Business)
Government proposals for improving the PAYE system could provide benefits for HM Revenue and Customs (HMRC), employers and employees alike, but introducing them will present significant challenges and will require the investment of substantial amounts of time, money and attention to detail if they are to work successfully.
That is the response of the Chartered Institute of Taxation (CIOT) to proposals floated in an HMRC discussion paper – ‘Improving the operation of Pay As You Earn (PAYE)’. The central proposal of the paper is for ‘Real Time Information’, a more frequent flow of information from employers to HMRC to increase the accuracy of PAYE deductions, tax credits, student loans, etc. However the paper also introduces the idea of ‘Centralised Deductions’, under which HMRC would, as the holder of all relevant information about each employee’s tax liabilities, deduct the tax before passing on the net salary to the employee.

John Whiting, CIOT Tax Policy Director, said: “The fundamental aim in this area has to be to get PAYE deductions to be more accurate so that the numbers of taxpayers over and underpaying each year are significantly reduced.

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“The idea of information flowing from employers to government as soon as circumstances change, rather than being reconciled at the end of the tax year, is a seductive one, but this proposal would be likely to load additional costs onto employers, particularly those who do not currently use electronic methods for paying their employees. The real benefits of real time information would only be seen if the system became truly interactive and allowed three-way communication and data transfer between employers, HMRC and employees. We are a long way from that.

“The proposal for centralised deduction of tax by HMRC should reduce employers’ admin burdens, but raises many other issues. Having the wages of every employee in the country passing through one huge data processor is high-risk and many people would be concerned by the prospect of their wages passing through the Government’s hands. HMRC’s help and advice services would need much greater resources if they are going to have to field the enquiries about deductions currently being fielded by employers.”

Centralised calculations
To allay some of these concerns the CIOT has suggested an alternative approach: Centralised Calculations. Under this approach, HMRC would do the calculations to arrive at the PAYE, NICs and student loan repayments due. HMRC would then simply notify the employer as to what deductions to make and the employer would make those deductions as it does now.

This would allow the employer to retain a greater control over its funds while HMRC deals with all the calculations through a central processing engine. This might be a first stage along the route to centralised deductions, i.e. to build confidence amongst employers and employees in the HMRC calculator, and enable teething problems to be ironed out with the assistance of employers.

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Susie Hughes © Shout99 2010

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