Do you know what RTI is? It stands for Real Time Information. If you are none the wiser, you are probably not alone. Many companies are only just beginning to realise what a huge change it will be.
In a nutshell, RTI requires all employers to send a return to HMRC every time a payment is made to employees, on or before the actual date of payment. So companies will need to send a return on the payroll date every month (or every week for some companies). But that is not all – companies will need to send another return whenever any other payment is made, such as a bonus, overtime, commission – and whenever an option is exercised or shares vest. There will be multiple returns.
Your colleagues in the payroll department will need to plan for this. New software will be needed, to cope with all these returns. And new internal systems will be needed, to ensure that the payroll department is provided with information promptly. This will affect you, and your share plan administrators.
When is this happening?
It is in force now, but not for all employers. A pilot has been running, with 10 employers, since 6 April 2012, and 310 more employers are joining the pilot over the next few weeks. By 6 October 2013 it will be compulsory for all employers, but HMRC has power to add any employer to the pilot at any time, so you need to be ready now. They say there will be 250,000 RTI employers by next March.
Will there be penalties?
Yes, there will be penalties if returns are not filed on time. But more importantly, RTI will give HMRC the information it needs to charge penalties for late payment of tax. You may think this won't apply to you, because you always pay tax on time – but actually, there are probably times when it applies to most employers who run share plans.
Technically the due date for payment of PAYE is 14 days after the end of the tax month (in other words, the 19th of each month). Usually employers have no problem complying with this, but sometimes payments miss the payroll cut-off date. This quite often happens with share plans. It is normal practice for these payments to be picked up in the following month. In the past, that was not a problem – employers just had to make sure everything was in order by the end of the tax year. But in 2009 legislation for in-year PAYE penalties was introduced.
Initially HMRC was not able to enforce the penalty legislation in practice, because there was no mechanism to determine the amount of PAYE that companies should pay each month. But now HMRC will be able to use the information delivered under the RTI returns to check whether the right amount of PAYE has been paid each month, and to impose penalties for late payment, even where it is only one month late.
The problem with share plans
Share plans do not fit neatly into the PAYE system, because it was designed for payments of cash, from which tax can be deducted. They have been shoe-horned into the system, using the concept of a "notional payment" to describe a taxable event which could be anything from an option exercise to the expiry of restrictions on forfeitable shares. Employers often can't control when these events will happen, and they can't know the value of the shares – and therefore the amount of the notional payment – until after the events have happened.
We are concerned that employers may be penalised for making late RTI returns, and late payments, despite making every effort to comply with the system, simply because of the nature of share plans and the way they are taxed in practice. This seems unfair.
What can we do to help?
We have had several meetings with the RTI team at HMRC, and we have explained the problems faced by employers in connection with share plans. We have already achieved one success – the RTI regulations allow employers to make a single monthly return for notional payments under share plans, instead of having to make a separate return for each one. This return does not have to be made until the 19th of the following tax month – the same time as payment of tax is due.
That is very welcome, and will certainly solve a lot of problems. But some problems remain, especially where the payroll cut-off date is missed. We hope it will be possible to reach a practical solution which will avoid penalties in cases where there are good reasons for payments being carried forward to the next month – for example where leaver information needs to be transmitted to a SIP administrator before the taxable value of SIP shares can be calculated.
This article is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters.
