Author: Yvette Lamidey
Published in: PP
Date:
Taxation: Online Filing
Doing it On-line – Filing in year returns
Filing in year returns on-line will be mandatory for all employers with an earlier start date for employers with more than 50 employees. This article takes you through the various forms and what you need to consider when implementing on line filing for P45 and P46 forms as well as the pensions notifications. Its not just changes to the payroll system that may need to be considered but also changes to processes and possibly other systems that feed the payroll system.
Filing end of year returns on line for many employers is now second nature and is something that employers and agents will be doing again in the coming weeks for 2006/7. And this year will be easier for many as they have corrected the data errors from previous years and through the built in validation within payroll systems, and the HMRC online forms and returns on data entry, as well as end of year processes. And dare I say it, practice makes perfect…..
A number of employers and agents have already implemented on line filing for in year returns either ahead of filing their first on line end of year return or afterwards, this is usually coupled with receiving tax code changes, P6, P6(b) and P9s and sometimes Student Loan notices. Those who have been using these services, taking aside the issues that some have encountered with the Data Provisioning Service (DSP) have found that it has been of use to them and their employees.
As you by now you will be aware from April 2008 it is mandatory that employers with more than 50 employees file on line their new starter notification forms i.e. P46 and P45(3), the leaver notification P45(1) plus the PENNOT that pension payers have to submit when an occupational pension or annuity starts to be paid. The PENNOT is a new notice and replaces the existing PENNOT and form P160.
And from 2010 all employers will have to file both these in year forms on line as well as their end of year return online.
Changes to how P11D data is updated in 2007 and the changes for 2008 mean that employers are likely to receive more tax codes for their employees another reason why you should consider implementing the receipt of tax code changes online.
Forms P46(car) and P11D haven't been included in the mandatory requirements but you are still able to submit these forms online.
NB . Even if you are already filing your in year returns online you need to take note of the information we are including in this article as there are some changes from 2008 and not only must you be prepared for this but your systems will also need to be updated.
So what do you need to think about?
Payroll systems
If you use a payroll system you should contact your supplier to find out what plans they have to deliver the requisite software that will meet these new requirements and that this will include all the validation routines that you will need to support this. You can use Internet or EDI to submit the forms as you do for your end of year returns.
If you have developed your own in-house system then you will need to consider whether you are going to develop the in year on line filing or use an alternative method. Notes for Payroll Software Developers have included the information that you will need for this.
Your payroll system may have the Payroll Standard accreditation, we are very pleased that although the Standard doesn't usually carry the details of the tax year that accreditation has been awarded for. However, since the changes for April 2008 are so significant all accredited products will have to gain Recognition for the 2008/9 forms P45(1), P46, P45(3) i.e. they will have to re-apply ; this can be applied for from October onwards.
Using an Agent
If you use an Agent then you need to talk to your agent to understand who will be undertaking what tasks. If your Agent currently completes and submits starters and leavers forms to HMRC then by logical extension you may want them to continue to do this but on line. They may already do so but you still need to check that they will have the relevant software to meet the new requirements. Even if you think that since your service agreement with your Agent states that they will submit the forms on your behalf you still need to explore with them what they are planning to do since it is ultimately your responsibility to file these forms online.
Using an Agent to file your Returns or HMRC Forms Online Forms and Returns
If you don't use a payroll system and do you payroll on paper but file your end of year returns on line via an Agent or through the HMRC Online Returns and Forms then you can also file your in year forms in this way as well. An Agent can file the forms on your behalf or you can use the HMRC screens. If you use an Agent for submission only then they must be registered for PAYE online for Agents, if the Agent is going to receive tax code changes on your behalf then you will need to submit a form FBI2 to HMRC.
The HMRC Online Returns and Forms screens can be used by any employer or Agent, provided that you have registered for Internet filing for these forms in the usual way. But remember that there is a size restriction it is not designed to take hundreds and hundreds of forms in one go from an employer/agent. But can be used as a back up if there are only a few forms to submit or if you are a small employer with less than 50 employees.
And of course you can mix and match, you may use Internet and EDI or use your Agent for some forms or parts of your payroll(s) and self submit other forms.
If you have a mix of services that are used for your payrolls i.e. an in-house system for part of the payroll and an Agent for another part then you need to make sure that both your system and the Agent's systems are being changed to meet the new requirements see the section on processes and procedures.
Implications for not filing on line
There are existing penalties under Section 98, Taxes Management Act 1970 for not submitting forms for starters to leavers to HMRC, although I can't recall a single instance where the use of this penalty has been reported. And there is an existing penalty for not filing end of year returns online so it would seem likely that there will be an equivalent penalty for not filing starter and leaver forms online. HMRC have already indicated that this may be the case in the February edition of the Employer Bulletin. We will advise of the full details of the penalties once these are known
This means that you need to ensure that your procedures are watertight.
If you have a dispersed payroll and outlying offices, local managers etc have in the past been able to send the hard copy P46 and P45 forms for new starters to HMRC you need to change the procedures. Either this becomes centralised so that the data is entered onto the appropriate system and the data submitted to HMRC or the data is entered onto a system remotely and then either imported into the payroll system for onward transmission to HMRC or directly submits the information to HMRC ensuring that the correct validation has been applied – this could even via the HMRC Online Returns and Forms.
You will need to ensure that in these circumstances that you communicate with the people who currently process the forms so that they are aware of the changes and the implications of submitting paper when the forms should be submitted online.
Some employers have a separate payroll for Directors and higher paid employees which may be operated by an Agent or the Company Secretary of Finance Director for instance. You will need to ensure that whoever operates this payroll also complies with the online filing requirements and that if a separate payroll system is used then this system is also compliant.
If an employer or Agent submits the forms by paper these will still be processed so that the employee is not disadvantaged.
What is changing?
Although there are regulations that specify the data required and the format of the data that should be submitted on these forms historically HMRC have taken whatever we have sent them. HMRC have then manually corrected the errors they were able to and if not may call to ask for additional information/clarification or send an enquiry form asking for further information.
To ensure that the forms can be processed quickly and easily and that the data that reaches the HMRC back end systems is as clean as possible there will be validation built into the HMRC systems similar to that used for end of year returns.
This validation will be included on the EDI and Government Gateway and the data submitted must meet this validation before it is accepted.
You will receive an acceptance message for the file that you have successfully submitted or a rejection message if the file has failed the validation checks. The rejection message will clearly identify the record that is wrong and the error so that the correction can be made and the file resubmitted in exactly the same way that you would resubmit an end of year return.
Developers are encouraged to build this validation into the data entry screens for their systems, if not to undertake some validation routines prior to submitting the data.
Date of birth and gender will be required fields from April 2008. And it is not possible to use a default date of birth, as is used for end of year, since this would mean the employee would not pay the correct NICs and impact on statutory payments etc.
Many employers have removed the date of birth from application forms as part of the anti age discrimination processes but you should ensure that HR and Line Managers incorporate a request for the date of birth as part of the offer process; perhaps explaining why this information is needed and advising that it will be given to an Agent if your payroll is processed by an Agent, but that it will only be used for payroll purposes.
So if the date of birth isn't provided it might be worthwhile thinking about where else this data may be held such as within the pensions department or on the HR system. It will be important to communicate with line managers and HR that it is imperative that the information that is received by payroll includes the date of birth and gender.
If you use a front end system to capture data for new starters such as an HR system, Time and Attendance system or some other bespoke data capture system and this system captures NINOs, date of birth and then the P46 or P45 information you will also need to consider whether the validation rules that need to be incorporated into payroll systems also needs to be incorporated into these front end systems.
The P46 and P45 stationery will also be changing to reflect the changes to the online forms.
In addition to this you will also need to capture online the field 12 on the P45(3) ‘Enter code in use if different to code at item 6' and section 2 on the P46 ‘Tax code used'. These fields are to be completed where the code on the P45 is not used or if a P46 is used to show the code used where statements A, B or C are used.
The form P45(1) will also be changed to show the Student Loan indicator.
There are some particular circumstances where entries are made in ‘red' on the P45 or where additional notes are added to the form. There is no equivalent of this online.
Developers are being encouraged to not only include the validation routines that will be applied at the gateway in their systems but also provide reports for employers that advises where a P45(3) or P46 hasn't been submitted for a new starter or equivalent for a pension starter in their first pay period and also a report that shows where a P45(1) hasn't been submitted for a leaver.
Changes to P46 processes
From April 2008 if an employee who has previously ticked box A or B but whose earnings have been low then once these earnings have exceeded the lower earnings limit then the form P46 must be submitted to HMRC; previously this would have been where an employee had reached the Earnings Threshold. This form must of course be submitted online for employers with 50 or more employees.
If an employee has ticked box C indicating that they have another job or are in receipt of a state pension then a P46 must be submitted when the employee starts to work for you.
From April 2008 employers do not have to receive a completed and signed P46 form from new starters who have not submitted a P45. Instead the information can be gained from the employee via the application form, information provided on accepting an offer, by email, online form etc. Provided that the data needed re the statements A to D are captured and there is some sort of audit trail then this will suffice. It is up to the employer to decide how this data is captured, stored and whether or not a signature is required.
The P46 could be completed and the data entered onto a system that transmits the data to Payroll or an Agent, again provided that there is an adequate audit trail then this will suffice.
What should you do if the employee doesn't provide a P46 or the relevant information?
If the employee doesn't provide a completed P46 or the information that is needed to complete a form P46 then you must apply tax code BR on a cumulative basis. The P46 data still has to be returned in the first pay period i.e. you will need to submit the NINO, date of birth, gender, name, address and indicate in section 2 that tax code BR is being used.
EDI users have been able to submit an incomplete P46 in the past i.e. where tax code was allocated. From April 2008 the employer must complete statement A, B or C and in the absence of any information from the employee then statement C should be submitted and tax code applied BR. An incomplete P46 submitted by EDI will be rejected and require correction and then resubmission.
What happens if you receive a P45 after a P46 has been submitted to HMRC?
Historically employers have been encouraged by their local office not to submit a P46 in the first pay period if they think they will receive a P45 at a later date. This in part is because sometimes the receipt of the forms could result in delays in the correct tax code being issued. This practice should have already ceased. And from April 2008 any of the problems that were manifested by this will be fixed by the changes to the HMRC systems.
Where a P46 has been sent to HMRC and subsequently provides a P45 then the information on the P45(3) must be used and the payroll records updated unless a P6 has already been received. Where a P6 has already been received the Regulations state the P45 should be destroyed. From April 2008 employers with 50 or more employees must send the P45(3) information to HMRC online so that the HMRC records can be updated.
Information received for a new starter from a previous year
Where the information for a new starter is submitted to HMRC in 2008/9 in respect of a 2007/8 starter the data submitted must comply with the new validation routines.
Payments to new pensioners or annuitants
The forms P46, P160 and the PENNOT will be replaced in April 2008 by a new PENNOT. When an individual starts to receive a pension the provider/employer will have to send in either a P45(3) or the new form P46(Pen). This form is to be completed irrespective of the age of the person receiving the pension.
HMRC are expecting to update the existing PENNOT message and the online P46 form will be rebranded as P46(Pen). The HMRC Online Returns and Forms will also be updated.
A paper form will be introduced that can be used by small pension providers/employers and or their Agents.
Tax code NI
Some payroll systems use a tax code of NI to indicate employees where only NICs are to be deducted. This is not a valid tax code and so must not be included on a P45(1), P45(3) or P14, if it is used the form will be rejected.
If NI only is being deducted a P45 should not be given to the leaver at the point of leaving. If a P45(3) is received with tax code NI then the P46 routines should be followed.
Common Errors
As with the end of year returns, HMRC have published a list of common errors forms P46 and P45. These errors will cause the files to be rejected from 2008. Developers are being encouraged to include in their system's internal validation routines that will either prevent the data being entered and then submitted with these errors or producing a report of the errors so that these can be corrected before the data is submitted.
P45(1) with no date of leaving
P45(1) showing a cumulative tax code but not total pay and/or total tax to date figures
P45(1) which shows a tax code on a week1/month 1 basis but no pay and or tax in this employment figures
P45(3), P46 or PENNOT with no date of starting
P45(1), P45(3), P160/PENNOT with no final tax code at date of leaving
P45(3), P46 and P160/PENNOT with no tax code in use
P46 where no statement is ticked
Employers will also have to enter the information that is pre-filled on the P45(3) by the previous employer in respect of the previous tax office. HMRC have recognised in the past that the new employer should not be responsible for the quality of the data provided by the previous employer and that the previous tax office details may not be correct and that where information is missing such as date of leaving or final tax code then the new employer will only provide the information that has been given. We hope that they will continue to accept this and work with us on these issues.
Local practices
There are a number of arrangements that employers have had with their local offices.
Some of them have been in place for so many years that people have forgotten that they are special arrangements. These may include using D0 tax code for higher earners with no P45 on starting.
These arrangements cannot be replicated in the ‘e' world and will have to cease by April 2008.
If you have a local agreement your tax office should be contacting you to discuss how to take things forward. But you may want to just check that you are operating the rules for starters and leavers correctly and if you have some variations in your procedures then you should contact your local office.
Benefits of using online in year filing
The biggest benefit will be to the employee, through sending their starter and leaver information online their tax code can be checked and if any adjustments are needed these can be sent back to the employer very quickly so that the employee is paying the correct amount of tax.
Of course if you implement that online tax codes as well you will also benefit from not having to enter the tax codes onto your system as well where your system allows for these to be directly imported.
There is less room for error as well since the data will be validated before submission to HMRC and so this should ultimately lead to less enquiry forms from HMRC.
Where to get further help?
As more information is available we will continue to keep you updated through Payroll Professional and New online. In addition you can find information in Notes for Payroll Software Developers at http://www.hmrc.gov.uk/comp. There is also an excellent Online filing and electronic payment hand book at http://www.hmrc.gov.uk/employers/doitonline.pdf and other information at PAYE online for Employers on the HMRC website. Plus the HMRC Online Services Helpdesk on 0845 6 055 999 or helpdesk@ir-efile.gov.uk.
You may also be able to get assistance from your payroll software provider, their user group, and IReeN.
If you have an HMRC account manager for online filing then you they will also be able to help you.
Start early
There is a lot to do between now and April 2008 even if you have already implemented the existing online in year returns. The earlier you start then the more chance of any problems being ironed out.
HMRC will give you all the assistance that they can but they do only have finite resources, so if you leave it to the very end of the 2007/8 year before you start your implementation you will be vying for time with everyone else so another reason to start as early as you can.
Yvette Lamidey
Yvette Lamidey is director of Paris and Parks Consulting
www.parisandparks.com