Contractors trading via a limited company and remunerating themselves using a low salary and high dividend strategy can now pay their salary annually under HMRC’s Pay As You Earn (PAYE) real time information (RTI) scheme, using a new annual schemes fix introduced by the taxman.
This guidance has been eagerly awaited, as when RTI was introduced in April 2013, no provision was made for limited company contractors making a single annual salary payment.
However, there is a sting in the tail. Contractors and their accountants applying to use an annual scheme won’t actually be notified by HMRC that their application was successful. The first a contractor will hear of an unsuccessful application will be when penalty notices drop through their letterbox.
According to HMRC, a contractor’s annual scheme must meet the following requirements to qualify:
- All of the contractor limited company’s employees must be paid annually
- Each contractor employee, and their spouse or other employees, must be paid “within the same, single tax month”
- The contractor’s limited company, their employer, should only be required to pay HMRC any PAYE and National Insurance Contributions (NICs) annually.
If a contractor has to make any additional payments under RTI during the tax year, they will automatically revert to monthly submissions. Subsequent failure to submit a monthly return will result in the contractor’s company being subject to HMRC’s “debt management processes”.
Contractors who have been submitting monthly RTI returns to HMRC since the scheme came into force in April 2013 can apply to revert to an annual reporting and payment cycle. However, until they are accepted, contractors are still required to submit monthly returns.
But, of course, contractors won’t know they are accepted, as HMRC will not notify them or their accountants. So it seems that at present the only way to confirm your acceptance is to stop paying monthly and, if you do not receive penalty notices, you are likely to have been accepted on the scheme. This is clearly ridiculous, and it seems likely HMRC will put in place some way to confirm that your limited company has moved from monthly to annual payments.
At that point, only a single annual return will be required, and there will be no need for monthly, or more frequent, RTI returns.