Minutes of the Employment Consultation Forum

Wednesday 10 December 2008

Attendees

Don Macarthur (DM) – Co- chair Business Customer Unit
Sue Hunt (SH) – PAYE SA & NICs Product and Processes
Paul Braviner (PB) – Large Business Service
Val Grant (VG) – Business Customer Unit
John Clough - Customer Operations
Sarah Walker (SW) – PAYE SA & NICs Product and Processes
Margaret Knights (MK) – PAYE MPPC
Sue Ellis (SE) – DMB Debt Management
Kshama Shore (KS) - DMB Debt Management
Sam Mitha (SM) – PAYE Income Tax and NICs
Hasan Mustafa (HM) - PAYE Income Tax and NICs
Rachel Button (RB) – Central Policy Powers Review

Karen Thomson (KT) – Co-Chair –IPP
Jackie Petherbridge (JP) – FSB
Alex Rowson (AR) – BASDA
Norman Green (NG) – BCS - PG
Abigail Morris (AM) – BCCKaren Thomson (KT) – Co-Chair –IPP
Ian Whyteside (IW) - AAT
Ben Webb (BW) – CBI
Michael Templeman - IOD

Apologies

Steve Dodd – HMRC
Sue Lely – HMRC
Alison Bainbridge – HMRC
Janet Mackinnon – HMRC
Anne Redston - ICAEW
John Hampton – CBI
Iain Scott-Shore - CBI
Trevor Blackmuir - ATT
Matthew Brown – CIOT
Glenn Collins - ACA
Peter Bickley - ICAEW

Item 1 - Welcome introductions and previous minutes

DM welcomed all – especially BW who was attending the forum on behalf of the usual CBI representatives. He explained that due to the fact that our presenter from the Powers Review had to attend a morning meeting, the running order of the meeting had been changed to reflect this, so AOB would be dealt with before the final presentation on the Powers Consultation document.

Minutes of previous meeting were agreed though an apology is extended to IW whose presence at both the June and September Forums was not recorded. Action points were closed and agreed as appropriate.

Item 2 - MPPC Carter sub group

MK introduced this item which will be a regular (and longer) feature in future ECFs due to the disbandment of the former MPPC Forum. Margaret will attend this forum in future in order to maintain consultation with employer reps and to deal with any queries or issues that members may wish to raise.

JP asked who was going to encourage small employers to file online and was told that the Carter team would be responsible for this piece of work once the regulations had been published. After publication, MK’s team will be able to increase the publicity. Meanwhile, telephone calls have already been made to those medium sized employers who have not yet registered and it appears that some intend to use payroll bureaux. Some small employers may opt to do likewise.

IW enquired when the two week shut down of PAYE systems would take place to allow the transition to MPPC. MK informed him that she was not yet at liberty to divulge the planned date but that there would be an announcement in the new year and it was likely to happen during a quieter period of time once work emanating from the Budget and recoding had been dealt with.

Item 3 - Pre-Budget Report changes

SM and HM outlined the income tax and NICs changes announced in the Pre-Budget Report (PBR). SM began by thanking members of the Forum for their contribution to the smooth implementation of the increase in personal allowances announced by the Chancellor on 13 May 2008. He said that Ministers had been impressed by and grateful for the manner in which the changes had been implemented, and that they had taken a keen interest in the operational implications of the changes announced at the PBR on 24 November 2008.

SM said that Ministers had considered a very wide range of options in the wake of the Finance Bill debates before making their decisions in the light of all the distributional, fiscal and economic considerations. The far-reaching changes announced covered three years, and affected all individual taxpayers, employers, employees, the self-employed and trustees.

The main changes proposed for 2009-10 included above indexation increases in the income tax personal allowance and basic rate limit, and index-linked increases to all other personal allowances, etc.

For 2010-11, there will be two separate income limits for the basic personal allowance. The personal allowance will be reduced for individuals with gross incomes before personal allowances above £100,000 and £140,000 on and after 6 April 2010. These 'tapers' would operate in the same way as the existing age-related allowance taper.

The restriction in personal allowances would be implemented through coding, with any residual changes being effected through self assessment (all those earning over £100k were supposed to be within Self Assessment). Since coding notices would have to be based on 'historic' data, HMRC would put mechanisms in place to ensure that those whose personal circumstances had altered in the interim were able to get their codes changed as necessary to avoid over-deduction. SM said that he hoped to discuss the implementation arrangements with the Forum nearer the time.

From April 2011 taxable non-savings and savings income above £150,000 will be liable to income tax at 45 per cent. Dividends taxable at the new 45 per cent rate will be liable to income tax at a new rate of 37.5 per cent. From 2011-12 the dividend trust rate will be increased from 32.5 per cent to 37.5 per cent and the trust rate of tax will be increased from 40 per cent to 45 per cent.

KT enquired whether the announcements re the tax changes planned for 2011 had cross party agreement. SM said no.

MT brought up the issue of withdrawal of personal allowances for non – doms pointing out that this would affect approximately 35 per cent of employees in the company he had worked for. It will create problems for those in the over £100,000 bracket as it is impossible to predict earnings. SM responded that the latest data available suggested that around 600,000 people fall into this bracket, with the majority earning in excess of £150,000. However, it should be remembered that the tax system applies to the generality of taxpayers and cannot hope to legislate for each individual case. He went on to say that HMRC is keen to react expeditiously to cases where high earners have a rapid loss of income.

MT suggested that share options could be exercised to reduce the amount of tax that needed to be collected in one lump sum. SM replied that HMRC wanted the maximum transparency of what it intended to do and would consult and benefit from the advice of this forum.

JP asked whether there were other mechanisms to use besides coding and Self Assessment to deal with these changes as there was a danger in basing these on historic data in that situations change and tax due could be over assessed. SM responded that HMRC wanted to ensure that there were fail safe mechanisms in place and pointed out that HMRC had undertaken to ministers that these changes would be implemented and there is an expectation on HMRC to do so smoothly.

KT and JP suggested using the tick box of the P46 for those earning over £100,000. SM stated that his team’s role is to point out what range of options are available to ministers and the consequences and impacts of each. They have worked hard to prepare all of this before PBR. The biggest influence in the PBR was the dramatic change in the financial situation.

CH suggested that HMRC should have allowed employees to opt for a different tax code from that which would be applied by the department – that may have been an alternative way of dealing with high earners. DM said that HMRC had been looking at P46 procedures, which have relied for many years on three different options prescribed in legislation and embedded in IT systems and quality standards. Changing from three options would be extremely difficult to achieve and would surely cause confusion as well. With the introduction of online P46s and of quality standards, there is concern that employees who do not fill in the P46 correctly will not have enough tax deducted since there can be no 'D0' option where all tax is taken at 40 per cent. The alternative being considered within HMRC is '0T'. However if this were to be used then this would have to be in place of the current BR code for Statement C. Representatives welcomed this possible strategy and HMRC will consider further.

DM then asked the meeting for views on the P45and P46 procedure, stating that when PAYE was introduced the assumption was that most new employees would be notified to HMRC via P45. However, in reality, most changes are today notified by way of P46, often because P45s are not being issued as soon as employment has ended. DM wanted to know whether it was inevitable that HMRC continues with the practice of late submission of P45s or whether there is something that can be done to software and payroll practice to speed up the issue of P45s.

KT replied that it could not be speeded up electronically as in order to produce a P45 the payroll had to be shut down.

NG said that computer payrollers would prefer employers just to notify HMRC of a new starter rather than use P46. The P45 can be produced relatively quickly, the method of processing based on period processing is causing the problem. A new way of notifying HMRC of new starters generally is required.

JP questioned whether the P45 is becoming obsolete where a new starter is concerned and suggested that HMRC need to consider making Parts 2 and 3 of P45 obsolete and reduce the burden on employers. A large number of employers are no longer using the P45 for starters but using the P46 instead. It is mandatory for employers to issue P45 but not mandatory for the employee to hand it over to the new employer. Should there be a change in legislation to make this mandatory?

DM thanked the representatives for their responses, which will be referred to the relevant HMRC experts to inform their thinking. The idea of replacing the historic 'P' forms by a more modern online notification of a new starter was challenging, but potentially quite attractive.

NICs changes announced at PBR

HM said that the Chancellor had announced that from 2011-12 the NICs primary threshold will be aligned with the weekly equivalent of the income tax personal allowance. The secondary threshold for employers by implication may be lower than the primary threshold in 2011-12 for which software developers should make allowance.

From 2011-12 the main rate of Class 1 and Class 4 NICs will be increased by 0.5 per cent to 11.5 per cent and 8.5 per cent respectively.

From 2011-12 the Class 1 employer rate of NICs will be increased by 0.5 per cent to 13.3 per cent. The increased rate will also apply to Class 1A and Class 1B contributions.

From 2011-12 the additional rate of Class 1 and 4 NICs will be increased by 0.5 per cent to 1.5 per cent.

The changes to the rates of Class 1 and 4 will require a National Insurance contributions Act. The Parliamentary timetable would determine when the NICs Bill would be introduced; it would be essential for the Bill to receive Royal Assent in good time for the changes to be introduced in April 2011. It was important that employers and software developers were aware of the possible timetable for the changes.

For 2009-10 the Upper Earnings Limit (UEL) for primary Class 1 National Insurance contributions (NICs) will be aligned with the weekly equivalent of the point at which people start to pay higher rate income tax.

The Government’s intention to align the UEL with the level of earnings at which higher rate income tax is payable was announced at Budget 2007. The Chancellor confirmed this intention in PBR 2008.

Once that decision was made and the weekly UEL was announced, it became necessary to align the prescribed equivalents of the UEL with the equivalent PAYE thresholds. As a result a minor change will be necessary to NICs secondary legislation. The change was announced as soon as possible after PBR. As the change was dependent upon the PBR decision, it was not possible to announce the change or to amend the legislation any earlier.

The UEL prescribed equivalent calculations need to be changed to ensure that the weekly and monthly UEL thresholds are aligned with the equivalent PAYE thresholds. This alignment is needed because employers would otherwise have had to deal with different PAYE and NICs monthly and annual thresholds. The change now puts the calculation of UEL prescribed equivalents on the same footing as prescribed equivalents of the primary and secondary threshold.

NG pointed out that some changes will need to be put into payroll software. Directors’ pay will be greatly affected. This should have been thought about a long time ago so that software developers could be alerted . As it is, they have had to postpone other planned changes to software in order to cope with the changes which HMRC will be introducing.

SM empathised with this but pointed out that until ministers advised what decisions they had arrived at, he could not even talk with colleagues in other parts of HMRC let alone externals as there was no absolute certainty as to what needed to happen.

NG pointed out that the annual figure for directors was not a multiple of the weekly figure and this should have been considered by both sides. Work would need to be carried out to change programs but the possibility of alignment should have been considered.

SM pointed out that we could not take it for granted that the National Insurance Bill would be passed. The Bill has to be prepared months beforehand and we do not know at this point whether it will just contain rate changes or other things too. The Bill has to go to both Houses before Royal Assent and the Lords have the ability to amend. All monies from National Insurance go to the contributory benefits pot so there will never be unified tax and National Insurance limits.
Item 4 - Employer Transformation Project

DM had talked about the Accelerated Solutions Event (ASE) in July at the previous two meetings and now wanted to update the members. What has emerged is a project called the Employer Transformation Project (ETP), and those involved are now at the stage where they want to expose the outline thinking to employers and their representatives. DM told the forum that he had already discussed the issue with the Payroll Consultation Panel (PCP) and the Taxpayer Data Standards Forum (TDSF) and now wanted to consult with ECF to see whether the same consistent themes would emerge.

A lot of the work going on involves internal processes and changes but DM wanted to inform the meeting to demonstrate that. HMRC is keen to make a difference and is looking for an endorsement of its broad direction of travel. He pointed out that any major change which the department seeks to make has to be justified by a benefits case - based on improved customer experience, improved compliance and reduction of admin burdens, but particularly focussed on cost-effectiveness to HMRC. HMRC would particularly welcome any assistance in quantifying savings to the department, which would be especially helpful in obtaining the necessary project approvals.

One thought is that employers could be segmented for some purposes to deal with particular types of industry or to deal with employers according to their size or perhaps consider different ways of treating employers – for example a stronger focus on those who appear to be poorer at complying – for example employment agencies; the catering industry; employers who have an enormous churn of employees.

From the two consultation panels we have already spoken to the main problem seems to be that they do not know who to contact within HMRC and so would like to see a Single Point of Contact established. One of the other responses was a call for HMRC to be more proactive in educating employers regarding their responsibilities.

Individual Customer Directorate has done a lot of work communicating with people to explain exactly how important the National Insurance number is. Not enough has been done to explain about employers paying tax and National Insurance on their behalf and that the employee must give the necessary information to the employer to ensure that this is done. HMRC were trialling some simple guidance which employers might wish to make available to employees, and representatives agreed that this might encourage employees to take more notice.

MT felt that start up procedures had been dealt with and urged HMRC to improve procedures on cessations. SH agreed that there are lots of problems – possibly as many as 400,000 employer records where there are no employees. There are processes in place to remove them but this will take time. So much money and resource is being wasted sending out tables and CD-ROMs to these employers so there is a cost benefit to HMRC in dealing with this. In theory, PSN would like to deal with cessations by email and telephone but records cannot be closed until it is established that there is no debt. It was agreed some 18 months ago that a limited company which has no employees but only directors earning below the LEL and no P11D issues, does not need to be set up but unfortunately there is still confusion in this area.. HMRC is doing some work with Corporation Tax (CT) staff and Companies House to improve procedures and guidance.

JP asked about the possibility of a booklet being prepared for closing a business or PAYE record - particularly relevant in the current financial climate. It was agreed HMRC could improve in speeding up decisions in PILONS and redundancy payments. Education in these topics needs to improve. DM and PB responded that Large Business Service (LBS) is very much focussing on education in this area, and is now being very proactive in going out to see if employers need assistance. Local Compliance are also responding similarly for smaller employers. HMRC needs businesses to come forward if there is a problem or an issue for example approach us at the point when something is happening ( for example laying off 500 staff), HMRC can help employers to get things done at the right time – easier than to correct errors years later.

CH pointed out that it would be clearer if the HMRC website used the term closing down a business rather than cessation which does not mean much to a small employer. The search facility and terminology need to be improved.

BW brought up two points , the first concerning the often horrendous and lengthy discussions involved around reconciliation of P35s – the process needs vast improvement . SE advised that this was most assuredly on the DMB agenda.

Secondly, could guidance be made available specifically around the cessation of PAYE schemes especially where one company acquires another. What is the correct solution? Guidance is necessary on mergers and acquisitions. At the moment there is inconsistency in advice given by HMRC.

DM responded that from this discussion and the two previous consultations it was clear that the heart of the solution was a central focus which could manage away the joins of the different directorates dealing with employers. He would report back as the work proceeded.

Item 5 - Powers Consultation documents

(Slides available from VG)

This session was delivered by RB and was centred on the proposed reforms of penalties and interest rates. Currently across the various HMRC taxes there are eight different interest rates and fifteen different penalty regimes which are bewildering, ineffective in some cases and disproportionate in others. RB pointed out that HMRC does not seek to impose penalties as a means of raising money but to influence behaviour. In a perfect regime, penalties should not raise any money at all.

RB took the meeting through the slides and there followed a particularly in depth discussion (followed up after the meeting with several email submissions from employer representatives) on the proposal to expand the P35 return to include 12 boxes showing the total amount due to be remitted for each month (not split into PAYE, NICs, SL or SMP or by employee).

Many of the representatives were horrified at the extra work that would be caused for employers and payroll. It seemed to them that it was unfair to burden the 60 per cent of employers who pay on time and that it would be better if the 40 per cent who were not compliant were targeted for compliance visits. Most felt that HMRC already had the information to identify these employers easily and that action should be taken to persuade errant employers to comply.

RB asked that representatives visit the Current Consultations page of the HMRC website to access the consultations and impact assessments in full as she was only able to give a brief overview here. She encouraged representatives to set out their views in response to those documents.

Subsequent to the meeting, RB has advised that the Central Policy Powers team would like to validate their assumptions about the administrative burden of expanding the P35 (and look at ways to minimise this) with a small group of employer organisations and software providers. The team will be setting this up very soon and those interested were invited to take part by contacting her.

AOB

There being no items of AOB, the meeting finished at 2 pm.

The next meeting will be held at 10.30 am on Thursday 26 March 2009 in Room G23 Bush House, Strand.