Contractors' Questions: Will RTI affect limited company directors?

Contractor’s Question: CUK is reporting that all contractors will be impacted by Real- Time Information, but on the RTI page at HMRC it says that the “self-employed” won’t be affected. I’m confused because as a new limited company, of which I’m the sole director, I thought I am self-employed, so am I therefore out of scope?

Assuming I am affected, is it likely that my accountant (I use one of the main contractor accountants) will handle the obligations under RTI for me? If not, perhaps I should have never got rid of my umbrella company, as presumably the umbrella company would have to deal with the RTI requirements? Either way, I just can’t imagine that limited companies are going to report to HM Revenue & Customs “on or before” making a payment; it just seems so impractical.

Expert’s Answer: Firstly, as a director you are not classed as ‘self employed’, but as a director of a limited company.

RTI catches limited companies

So any salary that you receive is through PAYE as an employee of the company which therefore means that you fall within the scope for RTI.

Secondly, RTI will affect any employer that operates a PAYE scheme regardless whether this is a director-only scheme or not.

What RTI is replacing

The current system in place for reporting for PAYE stipulates that at the end of the tax year an employer has to submit a P35 Employers Annual Return to HMRC by May 19.  This return includes details of all employees’ (including directors’) payments that have been made through PAYE and details of any tax, NI and any statutory payments that have been applied within the tax year.

What RTI is

RTI is a new way of reporting this information to HMRC.  RTI will see the introduction of the returns being submitted on a monthly basis as part of the payroll process rather than at the end of the year. This is not an entirely new system as monthly reporting has been in place within the construction industry scheme for some time (known as the Construction Industry Scheme - CIS).  It’s important to make clear - RTI will affect only the submissions of PAYE and will not affect any payment arrangements, which will remain the same.  RTI will also override the need for submitting separate starter (P45) and leaver forms (P46).

The pros of RTI

The main benefit of RTI is that it will make the PAYE system easier for employers, pension providers and HMRC to administer and, in time, the information will be more accurate for individuals. The records that HMRC hold will be based on up-to-date information rather than only having available information from a previous tax year. This will mean that HMRC will be able to review whether an individual is being correctly taxed and make any necessary amendments to tax codes a lot quicker than with the current system. This in turn will ensure that more employees will pay the correct amount of tax and NI in the tax year.

RTI for all from next October

This new system is still being trialled by a selection of employers and HMRC.  Most employers and pension providers will start to use the system from April 2013, but all employers will need to start using RTI by October 2013.

How RTI affects umbrella companies

In response to your final question, had you remained as an employee under an umbrella scheme, the administrator of the PAYE scheme at the umbrella company would have had responsibility to file RTI. However, you would be paying more in tax and National Insurance. As you currently have an accountant or payroll provider then they will most likely prepare and submit these returns on your behalf (we will be doing this for our clients). So long as you have a good accountant you are unlikely to feel many effects of RTI

What’s wrong with RTI

The downside of RTI is a massive increase in administration and red tape for payroll and an inability to back-date amendments to employee or directors’ PAYE. This is part of a long term aim of HMRC to augment their systems with the universal tax credit system. In future HMRC will be able to see what any individual is paid and consequentially amend any benefits (including child benefit). What is really worrying is that long term, HMRC want to administer the pay themselves. They are aiming for employers to transfer salaries to the Revenue who will then forward onto employees their pay less tax.

In the current financial environment, we are sceptical that RTI can be successfully implemented in its current form. With pressure on the coalition government to grow the economy, the burden of red tape and bureaucracy of RTI has the potential to harm contractors, entrepreneurs and small businesses alike. The worst case scenario of RTI is that it could drive more unscrupulous employers to pay cash in hand.

The expert was Gemma Reynolds, head of personal tax and payroll at the Low Tax Group.

Editor's Note: Further Reading -

No more hiding! Are you ready for RTI?

Contractors' Questions: Will RTI affect umbrella company contractors?