How to become an IT Contractor - Becoming an IT Contractor

This article was kindly provided by Qdos Consulting.

'Improving the operation of PAYE' is the subject of a discussion paper recently published by HMRC (PDF link).

PAYE has been with us for 66 years and costs HMRC £1 billion to administer but the Government want to reduce these costs further and also reduce employers' costs by making the system easier to manage.

The paper proposes two solutions, Real Time Information and Centralised Deductions.

Real Time Information

Under Real Time Information employers paying electronically would send HMRC details of an employee's pay, tax deductions, NIC and student loan repayments, along with information about the employee's identity, at the point that payment is made to the employee. HMRC believe the benefits of such a system are:

- Simplification of the P45/P46 procedures when people change jobs;
- Substantially reduced and simplified end of year procedure for employers as information would have been provided continuously throughout the year;
- Improvement of the benefits and tax credits system through streamlined administration and reductions in fraud, error and overpayment.

Employers would still remain responsible for the calculation and deduction of tax, NIC and student loan repayments.

Following on from Real Time Information, HMRC propose a further radical step, Centralised Deductions.

Centralised Deductions

This option would pass the responsibility for doing the PAYE calculations away from the employer to HMRC. The idea is that the employer would send HMRC the gross payment through the electronic payment system to a central calculator where the deductions would be calculated automatically. HMRC would then send the resulting net payment to the employee's bank account and the deductions paid directly to the Treasury.

As employers would no longer be responsible for calculating the tax, NIC and student loan deductions, there would be no need for tax codes thereby making life simpler for individuals.

Information about deductions may not, however, appear on an employer generated payslip. Instead, individuals could be given access to their consolidated tax account which would show how deductions have been calculated.

HMRC is also interested in receiving suggestions as to how the reporting of benefits-in-kind could be simplified using Real Time Information.

The closing date for responses to the consultation document is 23rd September 2010.

"Is more Big Brother the answer?"

Whilst proposals to make life easier for both employers and employees alike are to be welcomed, is more Big Brother the answer? HMRC does not have a particularly impressive track record when it comes to IT implementation and given that Government departments are having to reduce spending by up to 25% will it really have the resources to provide advice to employers when the questions come flooding in?

Real Time Information certainly has merits and is worthy of further exploration but Centralised Deductions may well be a step too far for many.