Real Time Information & its implications for contractors
The facts behind Real Time Information
Intouch Accounting the personal online accounting adviser for contractors and freelancers, looks at the scope of the RTI (“Real Time Information”) and how it affects contractors.
We consider the penalty regime and what the implications are for contractors who trade through their own limited companies.
Make sure you’re not the one who ends up doing all the administration. Intouch intends to protect all of its clients – does that include you?
Real Time Information
Real Time Information (RTI) is a system introduced by HM Revenue and Customs (HMRC) for the reporting of payroll information. Employers provide detailed information to HMRC every time employees are paid, rather than annually, at the end of each tax year.
What is RTI?
RTI is a way of reporting payroll information to HMRC. It is a mandatory system of returns and has two main submission types. The first type must be submitted every time wages or statutory payments are paid to an employee or director. This is called a Full Payment Submission (FPS).
The second type must also be submitted whenever reductions in the PAYE liability for statutory payments to employees or directors are claimed or serves as a “Nil” return when no tax or NI is due to be paid for the period. This is called an Employer Payment Submission (EPS). RTI also overrides the need for submitting forms P45 and P46 to HMRC for leavers and starters during the year because these details are now electronically sent with the returns. However, form P45 will still have to be produced and given to employees.
It’s important to know that RTI does not change how PAYE and NI are calculated or alter any existing payment dates. RTI makes no change to the normal due dates for these payments and does not change the way in which payments are sent.
Why was it introduced?
RTI has been in existence for a year now, but we’ve yet to see if it’s met the expectations of HMRC who believed RTI would:
Make the tax system more accurate.
Tell HMRC what is due earlier, and enable them to pursue late payments more effectively.
Reduce the incidence of tax fraud and loss through non compliance.
Support the new Universal Tax Credit and reduce excessive payments, tax credit errors or fraudulent claims.
Provide them with more up to date information about taxpayers, including the hours they are working.
Certainly the fact that the new penalty regime has been pushed back twice now would indicate that neither employers nor HMRC have found the new system to be simple to implement!
What is RTI in practice for employers?
How RTI affects each employer depends on how they process payments to employees, how big they are and the systems they have in place. We’ll deal with how RTI specifically affects contractors below, but generally all employers:
- No longer submit new starter form P46 to HMRC.
- Add in P45 data for a new starter and submit that via the normal RTI filing.
- Submit a final FPS or EPS via RTI rather than filing a P35, which includes the questions from the old P35.
- Obtain standard data for every employee (and some new information that needs to be submitted).
- Complete forms P60, P9D/P11D and P11D(b) as normal.
What’s the downside?
It’s not a strong argument to say that it’s unfair to have to provide HMRC with the information to collect the right amount of tax, and on time!
RTI does however make it more difficult to back date amendments and corrections to employee or directors pay. This means any decisions about pay and how payments made to employees and directors are treated have to be taken much earlier than in the past.
If you are a benefits claimant then RTI means that HMRC are able to see what any individual is paid in real time. This enables them to amend benefit claims, including possibly the withdrawal of child benefit much earlier.
As we’ll see below all employers need to submit data to HMRC about their employees. They also need to maintain up to date information about these employees, ensuring their systems make this data readily available to them.
RTI makes it more difficult to back date amendments to pay. This means any decisions about pay for employees and directors have to be taken much earlier than they were in the past.
What returns are required?
There are two types of return necessary under RTI, a Full Payment Submission (FPS) and an Employers Payment Submission (EPS).
Full Payment Submission (FPS)
The FPS is the main submission type. It contains details of all employees that are being paid and includes details such as their tax code, gross pay, tax deducted, NIC, statutory payments such as SSP (sick pay), SMP (maternity pay) and student loan deductions. It also provides HMRC with details of any starters and leavers since the previous FPS.
FPS’s must be submitted on or before any payment is made to an employee, this means that you have to submit one every pay period, whether that’s daily, weekly, fortnightly, monthly or any other ad hoc pay date.
Employers Payment Submission (EPS)
The second type of return is an EPS. The most likely time an EPS will be required is when an employer has made no deductions from employees during the month so that no PAYE/NI payment is due (a nil return); but EPS returns are also required if any statutory payments (SSP, SMP etc) to employees are being recovered or any NI holiday or compensation is being claimed.
If the employer ceases to employ anyone then the EPS becomes the final return and a means to notify HMRC that no further returns will be submitted.
You may find in a particular pay period that both a FPS and an EPS are needed, or that only a FPS or only an EPS is required. Getting this right is important, as any late returns could mean a penalty.
You may find that both a FPS and an EPS are needed, or that only a FPS or only an EPS is required. Getting this right is important, as any late returns could mean a penalty.
Penalty for late returns
For tax years 2012-13 and 2013-14 there were no penalties if in year submissions were late.
HMRC intended to start the new penalty regime from 06 April 2014, but it was delayed as Employers were finding the new system more difficult than HMRC anticipated. A cynic would say HMRC themselves were also finding it more difficult than anticipated!
The new timetable will be:
- April 2014 – in-year interest on any in-year payments not made by the due date.
- October 2014 – automatic in-year late filing penalties.
- April 2015 – automatic in-year late payment penalties
Does RTI apply to the self-employed without any employees?
You would think not, because they don’t pay PAYE on their earnings and without employees what would they submit? However, in order to claim the new Universal Tax Credit, even the self-employed have to make RTI based submissions.
Am I employed or self-employed?
Some contractors confuse the term ‘self-employed’ with the arguments used for IR35 and AWR purposes and believe they are ‘self-employed’ generally for tax purposes.
In fact, contractors working through their own Personal Service Companies (PSC) are employees of that company, and that includes directors. They are not self-employed. Their company is an employer. So RTI does apply to all PSC’s.
Does RTI affect umbrella workers?
The simple answer is yes
It’s the Umbrella provider that has to worry about RTI submissions because contractors working through an Umbrella are simply their Umbrella’s employees.
RTI affects you if you are claiming benefits as HMRC know more about your finances, quicker than they did before. HMRC will want to know your current details, so you’ll need to keep your Umbrella up to date. RTI should mean that Umbrella workers can move between Umbrellas easily or switch to a PSC more smoothly as RTI will handle the PAYE side of things automatically.
How does RTI affect contractors operating via their own company?
If you have an contractor accountant, like Intouch, the accountant should look after your payroll and will be operating the RTI submissions on your behalf. If you don’t have an accountant, or have one but look after your payroll yourself, then RTI will impact you more.
Your accountant should look after your RTI submissions; if “ you don’t have an accountant RTI will impact you more.
FPS returns have to be sent on or before payment is made. If they are submitted late then under the penalty regime a financial penalty will arise. To avoid a penalty you will need to work with your accountant to address a few key areas of potential risk.
The first issue is how to inform your accountant when or before a payment has been made. Unless your accountant is made aware of payments when they are made all FPS returns will be late!
The second issue is how to clearly describe the nature of a payment that must be reported. It is important to distinguish between, say, a salary, which is reportable and a dividend, repaying expenses or repaying a loan, which are not reportable. To assist with this your accounting information will have to be precise and made available to whoever submits your payroll information in real time. You have to think about how best to describe every payment to make sure it’s properly recorded and only the right amounts are submitted. For example, a single cheque covering net salary, expenses and a dividend is not going to be very helpful when trying to make the correct submission.
The third issue is making sure your accountant knows that you are taking a salary, what the regular amount is; when in the period you take it and whether that salary is continuing each month. Without this information they cannot submit the correct return or payment on your behalf.
Finally, you need to make sure that your accountant holds completely up to date personal information about you. Have you moved? Have your circumstances changed? Be sure to check this.
Most contractors take a regular salary, but not all pay that salary either as a single payment or on the normal pay date. The FPS must be submitted no later than the date payments are made, so caution is required. You need to be disciplined under RTI.
Here is a list of the basic actions you must ensure are sorted out each year:
- Make sure your accountant has up to date information about you and your employees.
- Make sure your accountant is will be dealing with RTI. If you do your payroll yourself familiarise yourself with the HMRC online system and toolkit or get your own payroll software.
- Decide on a fixed salary per month at the beginning of the year and calculate your PAYE in advance.
- Pay those wages by standing order on a specific date (the mandate can list specific amounts and dates to allow for NI deduction fluctuations towards the end of the year).
- Notify any changes to your accountant in advance if you have one.
- Carefully consider how you intend to treat other payments such as dividends expenses and other money paid to you or on your behalf.
- Submit your accounts to your accountant every month and make sure you discuss any unusual amounts taken from the company on or before the date you take them.
- Complete a proper IR35 assessment for every contract and extension, and make a decision about your IR35 status so payments you take can be correctly reported.
You need to be disciplined under RTI by submitting your accounts to your accountant every month, deciding on a fixed salary at the beginning of the year and paying those wages by standing order on a specific date
Spouse / Partners wages
Everyone likes to keep tax down. Paying a salary to your non-working spouse or partner has always been one weapon in the armory. But under RTI things may need to be reconsidered.
Firstly RTI introduced a new piece of information that must be submitted; you need to tell HMRC how many hours employees “normally work”. This could potentially be problematic as it puts them on notice of the time commitment and the rate of pay. This means that spouse or partner’s wages need to be carefully planned and controlled under RTI.
Directors National Insurance
Directors are able to delay paying NI until they have exceeded the annual NI threshold and then pay NI on their full salary. This causes no problem with RTI and directors can continue to pay NI in this way.
End of year changes, bonuses and clearing DLA’s
Unfortunately not all contractors manage their PSC finances perfectly. That’s understandable, but RTI introduced some more problematic obligations
Most contractors are directors and shareholders in their company, and as such will have some form of wage set up, will claim expenses and also pay dividends. Often the wages are set up at the beginning of the tax year but few contractors actually pay the wage either on a specific date or the actual specific amount. Instead they take a lump sum covering wages, expenses and dividends, or simply take lump sums throughout the year and hope to sort it out at the end when the accounts are done.
The problem with this is that by the time your accountant knows what payments you have taken the deadline will have passed.
What needs to be entered on the FPS return under RTI and when should it be submitted?
In the past accountants have tended to transfer unpaid salary to a directors loan account, as with any expenses not yet reimbursed, or perhaps even a dividend declared but not yet paid. This increases the amount of money due to the director against which any lump sums withdrawn are offset. At the year end the accountants normally sort out the mess with some form of adjustment, dividend or bonus. This ‘leave it to the last minute’ approach is not sustainable under RTI without penalties being incurred.
Many accountants and contractors are going to have to change their ways and work both more closely and more frequently with each other to make these decisions earlier.
Your company may only pay you a very small salary, perhaps less than the Lower Earnings Level NI threshold. If this is the case you will avoid any PAYE payments during the year and may not need to submit the FPS every time you make a payment of salary. However, do watch out for excessive drawings that are later treated as a salary, as these will be treated as creating a late submission.
More importantly, remember that although you have no PAYE payments the monthly ‘Nil’ EPS is still required. Either way, it’s safe to say you will be submitting at least 12 RTI submissions each year.
If you stop contracting and no longer take a salary RTI will continue until you close down your PAYE scheme with HMRC. You must still submit the ‘Nil’ EPS every month or suffer a penalty.
Correcting mistakes – making final decisions
RTI is actually very good at correcting errors, because it’s reporting is based on a cumulative basis, so errors and mistakes are automatically adjusted. However, this is going to cause problems with final year end adjustments that fall outside the typical tax year end.
Bonuses declared at the end of a year to compensate for excessive amounts of cash drawn earlier in the year, or late IR35 “deemed salary” calculations are both areas likely to incur some form of late filing penalties.
Sick Pay and other statutory payments
If you do make any claims for statutory payments such as SMP, SPP or SAP then your company must file an EPS.
It’s worth having a chat with your contractor accountant about maternity and paternity pay, if they may be applicable.
Again IR35 raises its ugly head. If your contract is assessed as being within IR35 at end of year, then the traditional “deemed payment” calculation followed by a one off PAYE calculation is no longer acceptable.
You will of course be taking money from the company throughout the year and under IR35 these will be treated as payments under RTI and for FPS purposes
Calculating the IR35 “deemed salary” and the PAYE liability could become a regular task required every time you take money from the company.
IR35 late decisions
The current IR35 rules give you until January following the end of the tax year to make a final decision on your status. This is when a deemed salary would have to have been reported on your self assessment.
Of course any PAYE payable would have been due in the previous April and interest would have been running. However, under RTI you would have been required to submit FPS returns during the tax year itself, linked to when you drew money on account of your “deemed salary”. These late returns potentially put you at risk of penalties.
Tax credits and Benefits
HMRC link RTI with the Universal Tax Credit (UTC) system. The RTI system means that HMRC have a clearer view on the earnings of many workers, meaning they can assess tax credits and benefits much earlier than they were able to in previous years. It’s therefore important to make a decision early on when setting salaries for those likely to claim tax credits or other benefits.
We’ve already mentioned that the self-employed have some form of RTI obligations if they want to claim UTC. You may also have obligations if you have work you do on the side in your own name (i.e., not through your company) as a real self-employed person.linked to when you drew money on account of your “deemed salary”. These late returns potentially put you at risk of penalties.
RTI requires contractors and advisers to work together in order to avoid penalties. It is difficult to correct errors after the event without incurring a penalty, and contractors want to retain flexibility over their payments. Our solution handles all the practical issues affecting our clients in a very simple and time efficient way, ensuring they will remain fully compliant with RTI. This clever solution developed by Intouch Accounting for its clients limits the risk of penalties under RTI and greatly simplifies the reporting our clients have to do.
Intouch Accounting – The perfect mix of Technology and Expertise
Intouch Accounting has advised thousands of contractors over the past 4 years, and helped many of them become Limited company contractors.
We have an experienced friendly team who can set up a company for you, provide a RTI payroll service for 2 employees, manage your accounts and provide ongoing advice in relation to wages, taxes and expenses. Giving you the opportunity to just focus on your contract.
As a Intouch Client you also get 24/7 access to our innovative Client Portal, which saves you time when managing expenses and invoices and lets you know where you stand at all times. You get all this for a monthly fee.
Why not explore what becoming a Limited company contractor means for you?
Give us a call on 01202 901 385 or visit www. intouchaccounting.com and we can go through your circumstances and advise on what is best for you.