How contractors can avoid imminent RTI penalties

Automatic £100 penalties will be issuable by the taxman for the first time from this Friday to each and every one-person business that fails to make monthly RTI submissions.

Most limited company contractors have a PAYE scheme, and therefore fall under the eye of this automated revenue-raising machine for HM Revenue & Customs, writes James Poyser, co-founder of inniAccounts.

RTI refresher for contractors

Any company with a PAYE scheme must submit information to HMRC every month using RTI (Real Time Information). HMRC wants to know about every payment made to employees, and if you choose not to make any payments in a given month you'll still need to let HMRC know. If you fail to notify HMRC about employee payments (or the lack of), you'll receive an automatic £100 penalty for every month you miss a submission.

As we’ve warned contractors before -- with RTI -- there really is no place to hide. This is even more the case with the RTI penalty regime, which applies to one-man bands from 06.03.15, as HMRC will not discriminate when it comes to these automatic fines.

How HMRC isn’t going to discriminate with RTI penalties

For example, if you have a PAYE scheme you must ensure you're submitting a return each and every month. If you open a PAYE scheme and don't pay anyone for the first few months, you must still make monthly returns. If you have a old PAYE scheme which is sitting unused, you must still make monthly returns. If you draw a lump sum salary at the end of the tax year, you still must make a return to HMRC every single month, include those months you choose not to pay yourself.

Put simply, if you have a PAYE scheme you must make an electronic return to HMRC every month, or you will be automatically fined £100 for every month you miss -- and they've made it very clear you're unlikely to win an appeal.

All RTI customers must check: accepted or rejected?

Unfortunately the headache does not end there. It is not sufficient to make a return to avoid a fine: the return must be successfully accepted by HMRC, which doesn't happen instantly. If there's any missing or bad data, then HMRC will reject your return.

This means after submitting a return you must remember to check until it's successfully accepted, or rejected. If it is rejected you must fix the return, re-submit it and wait for acceptance. HMRC's validation process is extremely strict, with public stats showing over 1 in 50 monthly submissions are failing to be accepted. Left unresolved these 1 in 50 companies can expect an automatic £100 instant fine. RTI is simply not fire and forget.

I can leave it entirely to my accountant, right?

Many contractors will employ the services of an accountant to manage their payroll, and make their RTI submissions. In this case it's imperative that you ensure your accountant is operating your PAYE scheme correctly, and this might not be as clear cut as you would hope. That's because RTI presents significant challenges for accountants. They have to invest in applications and processes, and upskill their workforce to cope with the demand of operating payroll in real-time. They need to ensure they connect to HMRC and start monitoring RTI return messages on a regular basis. They need to have the knowledge to rectify technical problems, and they need the experience to rectify data issues. They need to have processes in place when a client is on holiday, or unreachable. And, ironically, if they're prevented from making an electronic return, they need to make an electronic return to justify the reason why!

We know all this as it's a process we've been through. We're a very unique accountancy practice in our industry as we not only have direct agent access to HMRC, but we're also a registered HMRC software developer with access to HMRC's technical team. We have a team of experienced software engineers and business process designers and we send thousands of RTI submissions each month. Yet even with our resources and skills, RTI often throws us curveballs - like HMRC's twice monthly batch 'real-time' processing!

The IT contractor who came close to £1100 in RTI penalties

We also know that less tech-savvy accountancy firms are really struggling with RTI. In one recent instance, we won a new client from a large specialist contractor accountant -- upon our routine checking of their RTI submissions, we discovered 11 months of errors which went unchecked and unnoticed by the previous accountant. From this coming Friday, the IT contractor in question could have landed a massive £1,100 in automatic penalties!

It’s because of the complexities and risk of penalties that we foresee less tech-savvy accountants charging more for payroll, or washing their hands completely of the liability and outsourcing it to third party bureaux. Therefore if you're currently using an accountant to process your payroll, now is the time to have a dialogue with them to ensure they're handling your payroll correctly.

In particular, ask them if they have a documented process to monitor RTI submissions and deal with rejections, and ask if they can provide you with an audit trail of successful submissions including a copy of the IRmark. The HMRC IRmark is your electronic receipt of submission and you'll need it should you ever be challenged by HMRC (yes it does happen - even following successful submissions - and the IRmark is invaluable). You should also ensure you're clear on payroll arrangements when you're unavailable.

How to meet your RTI obligations without the help of an accountant

But what if you're submitting RTI returns yourself? In this case we'd advise you to take some time out this week to make sure you're doing it correctly. You need to ensure that every month you're submitting either an FPS (Full Payment Submission) or, if you're not paying any salaries that month, an EPS (Employer Payment Summary).

Once either of those has been submitted, make sure you're familiar with the process of checking they've been accepted by HMRC, and that you know how to receive messages electronically back from HMRC. Then make sure you check for messages and failed submissions on a regular basis, otherwise you could be fined without warning. It would also be wise to think about what you're going to do when you're away on holiday - you'll still need to submit your returns to HMRC. And, as I'm sure all wise IT contractors do, ensure you've got a DR plan. What happens if an operating system update or virus kills your machine or your payroll software? What if your online payroll provider is down when you need to make your submission? If you're using free payroll software consider switching to something with a reasonable SLA.

And finally…

The next few weeks may be stressful for many of the UK's 5 million small businesses who could be on a collision course with HMRC's latest automated penalties. We suspect HMRC is acutely aware of the potential impact -- just last month they announced a three-day concession on submission due dates, presumably in attempt to stem a ‘bow wave’ of penalties, inbound calls and appeals. 

Therefore if you want to avoid sleepwalking into automatic penalties take time out this month to ensure that your PAYE scheme is operating correctly and you're getting successful notifications back from HMRC, regardless of who's pushing the buttons.

And here's a final thought: if you think an automatic £100 fine is scandalous, wait until pension auto-enrolment arrives -- the penalties for not submitting information are up to £5,000. And no, contractors aren't exempt.

Wednesday 4th Mar 2015
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Written by Simon Moore

Simon writes impartial news and engaging features for the contractor industry, covering, IR35, the loan charge and general tax and legislation.
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