Contractors may benefit from radical new approaches to PAYE

Contractors on agency payrolls and working via umbrella companies could benefit from radical proposals from HMRC to modernise the collection of income tax, National Insurance Contributions (NICs) and student loans via the Pay As You Earn (PAYE) tax system. The proposals are based on using real-time technology, thereby reducing time, errors and costs.

According to HMRC, its document, Improving the operation of Pay As You Earn (PAYE), is “intended to start a discussion about the collection of Real Time Information for PAYE and to introduce the Centralised Deductions option while inviting any alternative proposals for achieving the stated objectives”. It suggests that PAYE could be calculated in real time, thus reducing errors, incorrect tax codes and reducing the administration burden for employers, including contractor agencies, umbrella companies and even limited company contractors who run their own PAYE scheme.

Dave Chaplin, CEO of ContractorCalculator, sees great merit in HMRC’s proposals: “The concept of saving historic payment data and producing PAYE calculations centrally in real time seems an excellent idea. Why have multiple software vendors building programs to do essentially the same thing, and why have companies and HMRC often having to reset tax codes based on historic data and P45s?

“We have the technology via the internet to offer a simple PAYE calculation system online to calculate correct tax in real time,” continues Chaplin. “It could even generate and log pay slips, perhaps delivering them electronically via email.”

In the discussion document, HMRC makes it very clear that these ideas are just that, ideas, and that it welcomes input from employers: “This document sets out a general approach to acquiring real-time information. Further work is required on the options for PAYE improvements based on the opportunities provided by real-time information.”

HMRC goes on to confirm that considerable further work is required: “Responses to this document will provide details of potential costs, benefits and other impacts. An impact assessment will then be prepared and published – once options for reform have been developed in further detail.”

“HMRC isn’t proposing that it becomes a payroll provider by collecting gross pay and distributing net after tax,” says Chaplin. “That would be a mammoth task and the taxman would be crazy to take it on. Instead, HMRC is simply entertaining some technological ideas to make administration of PAYE run more smoothly for everybody, and that could directly benefit contractors, whether they’re on agency payrolls, working via umbrella companies or running their own limited companies with a PAYE payroll.”