HMRC has acknowledged that problems with the new Real Time Information (RTI) system could see tens of thousands of taxpayers receiving incorrect PAYE codes according to Harris & Co chartered accountants whose are small business accountants.
Estimates suggest up to 40,000 people may have been given the wrong code after difficulties in two areas. The first relates to the Employer Alignment Submission (EAS) which HMRC uses to match its records to a company’s own payroll records for those businesses with more than 250 employees.
While submission of a partial EAS is allowed, when some companies have entered their first Full Payment Submission (FPS), any employee who is not included on that submission has been treated as having left the company.
As a result, their record has been closed, along with the history of any benefits in kind. When that same employee appears on any subsequent FPS, they are treated as a new starter and given a tax code which does not reflect any benefits in kind they may be receiving.
Smaller companies are not expected to provide an EAS, but have still run into problems when they have employees on the payroll who have not been included in the first payments made via RTI.
David Heaton, tax partner with Baker Tilly said: ‘This particularly affects employment agencies and umbrella businesses who often have employees with zero hour contracts who are not necessarily paid every week. It also impacts on smaller companies which have both weekly and monthly payrolls under the same PAYE references.’
Heaton said there were also instances of HMRC issuing what were effectively ‘phantom’ tax codes, which saw individuals being issued with D0 codes because a mis-match of information on the RTI system meant it was assumed they had a second job. These individuals faced paying higher rate tax on both their current job and a previous post, which they may have left years before. He quoted the example of someone working in a large company who saw an overpayment of £835 in tax in the first month of RTI operation as the result of such a change.
The firm has had reports of a case in Newcastle where the employer had 500 incorrect coding notices out of 2,000 employees.
‘HMRC is relying on employers and their employees spotting errors and then calling the appropriate helplines to get the code fixed. But many employees don’t understand their PAYE code, and there is no way for employers to work out which codes may be wrong,’ Heaton said.
HMRC said: ‘We are aware of a problem affecting a very small number of employers and a small proportion of their employees. We are working with those employers to enable them to rectify their employee records.’
Last month small businesses reported problems with the free software provided by HMRC for employers with nine or fewer employees to use the RTI system.
The Basic PAYE Tools (BPT) software package experienced a glitch which meant an error message appeared when employers attempt to make PAYE submissions. HMRC said the problem was down to the removal of a registry key during a Windows update, which meant the software could not successfully submit the information.
The problem has now been addressed in an update to the software released last week.