For the last few years, the HMRC have very generously provided a concession to small employers to allow them to come to terms with the extra obligations the RTI Payroll reporting regime places upon them. They have not applied the penalties for non-compliance that larger employers have been subject to.
That concession ended on 6th April 2016. From now on all employers will be subject to a penalty of £100 for each month a RTI return is not filed. So if am employer does not file their April, May and June 2016 returns on time, they will receive a penalty notice of £600 sometime in late June or July giving them the bad news.
Penalties for late PAYE/NI payments have already been introduced. The penalties vary from 1% to 4% of the amount paid late, depending on the number of late payment defaults incurred each year.
Many organised employers will agree the RTI reporting system has reduced the level of work they have to do each month. Most of the extra compliance work is handled automatically by the commercial payroll software they use and the only downside is the sharp increase in the cost of that software.
In years gone bye, most small business owners were able to competently manage their own payrolls in-house. Unless they invest in specialist training then they will be hard-pressed to understand and comply with the intricacies of RTI reporting, especially when work-place pensions start kicking in over the next twelve months.
Out-sourcing the payroll function is the new fashion, and taking this step can often save a business a great deal of money each year. Out-sourcing is not without its problems, however, and it is essential for employers to agreeing a rigid framework of exchanging the required information each month so everyone knows who is responsible for what.
Many accountants, like MAAP, will have managed their smaller clients' payroll function as a very small part of the overall cost of providing the complete year end accounting and tax advisory service. From 1st April 2016 it is likely many accounting firms will have to revise their fees upwards to reflect the significantly higher costs of managing their clients' out-sourced payrolls. This will especially be the case when clients start meeting their obligations under the workplace pension regime.
The real sting is not so immediately obvious, but it will affect those directors who continue to draw down more money from their company each month than the RTI-reported salary, expenses and available declared dividends provide for. Continuing to do this against good tax planning advice is just going to precipitate a higher tax bill when the year end accounts are prepared.
The company will face a 25-35% surcharge to Corporation Tax for any loans made to a director in the year if the amount has not been fully repaid within nine months of the tax reporting date. The extra tax paid can be reclaimed back from the HMRC when the director's loan has been repaid, but as it can take over a year to receive the refund, such surcharges can often be a disaster as far as business cash flow is concerned.
The need to consider the tax implications of a director's loan often only materialises when the year end accounts are prepared and it is discovered there is insufficient distributable profits to justify the withdrawals made and expected to be covered by the dividends declared for the year under review. To make matters worse, we often find the company cannot afford to pay the extra tax on an overdrawn director's loan account, nor can they afford to pass the required bonus as a salary after the event and before the expiry of the nine months limit to clear it. The only other remaining option available is the director to repay the overdrawn amount back to the company from private funds.
The new and worrying dimension to the director's loan question will arise where a director has created the loan by regularly making a series of withdrawals each month from the company's bank account for private expenditure that cannot be supported by the salary and legitimate dividends declared. The Companies Act now allows companies to vote through a loan to a director and a properly convened meeting that is duly minuted and recorded in the company's records. That is not the same as a situation where the director just uses the company's bank account as an extension of his own private bank.
The issue here is that the HMRC will be fully justified in viewing these private payments as distributions subject to PAYE/NI. There is nothing new in that treatment, but the profession is waiting to see how the HMRC will apply the penalties to what will be false accounting by the employer under the RTI rules if there are grounds the employer should have realised that the salary and dividends they were presumably voting through were insufficient to cover the actual withdrawals being made.
The point we hope directors of small companies take on board is they can no longer declare monthly dividends on a wing and a prayer to cover the money they withdraw from the company each month. Every dividend declared must be covered by a signed minute approving the dividend with due regard to making sure the company has the distributable reserves to support it. If companies and directors don't take enough care over how they allow extract their profits from their company, then RTI may just come back and give them one hell of a headache over the next few years.
Generally speaking, we consider the HMRC's introduction of RTI payroll reporting a step in the right direction. Especially as it is making a huge contribution to stopping benefit fraud, which was one of the main reasons it was introduced in the first place.
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