Category Archives: KPMG

Real time information – the good and bad

By Tony Collins

Widespread publicity over the past week has drawn attention to inaccuracies in Real Time Information, HMRC’s system for handling PAYE submissions from employers every time they pay an employee rather that at the year-end. The Daily Telegraph broke the story with the headline

“Five million UK workers face uncertainty after tax bills wrongly calculated twice in HMRC blunder”

The BBC said tax  statement errors affect thousands of people.  Accountancy Live reported that tax experts were urging HMRC to review RTI to see if it’s fit for purpose. The FT reported HMRC as admitting that an “unknown number of inaccurate P800 statements and payment orders for the 2013/14 tax year had been sent to taxpayers since September 15”.

But HMRC says that RTI is a success for more than 98% of those employers who have to use it.

Tens of millions of PAYE employees are now on RTI – and if the system were a disaster HMRC and MPs would be deluged with complaints. That hasn’t happened.

Indeed the National Audit Office was complimentary in its audit of HMRC’s 2013/14 accounts of the ability of RTI to give employees the correct tax code when their jobs change – thereby reducing the levels of under and overpayments.

“Data quality has improved and HMRC’s own evaluation suggests that RTI is helping to change employer behaviour by encouraging them to tell HMRC of changes in employee circumstances earlier,” said the NAO.

RTI – the good and bad

The good news for HMRC and the government’s welfare reformers is that Universal Credit, which relies on RTI to calculate benefits, is running well behind its original schedule.

UC is rolling out to a small number of people – fewer than 12,000 by 14 August 2014 –  rather than the expected 184,000 by April 2014, according to the DWP’s revised December 2012 business case.  This means that inaccuracies in RTI will have little effect on UC for the foreseeable future.

The bad

If RTI cannot be relied on to provide accurate information on whether Universal Credit claimants are paying the right amount of tax, UC cannot be relied on to provide correct payments to claimants – which would undermine the welfare reform programme.

Another problem is that tax experts are weary of HMRC’s repeated blaming of employers for RTI’s problems. One of the reasons RTI contains inaccuracies is that HMRC uses employers’ changing internal “works” numbers as individual identifiers, as well as the National Insurance Number.

Employers change their payroll works numbers for a variety of reasons, say when an employee is promoted to management, when the company wants to distinguish various groups for the employer’s own purpose, or when an employee moves location.

The works number is for the internal use of the employer but is included in information submitted to HMRC. The number is “owned” by employers and is for them to use and administer as they see fit. It should have no relevance to HMRC.  But when the works number changes, it can trigger a false assumption in HMRC’s systems that the employee has two employments, with the same employer.  This would generate an incorrect tax code – and would be HMRC’s fault, not the employer’s.

Steve Wade, tax director at KPMG, puts it well.  He says of the latest publicity about RTI errors:

“These systems issues are causing so called ‘employer errors’, which is where the data supplied by the employer is not processed by HMRC systems as expected.

“Sometimes this can be due to bad data being supplied but equally it can be due to errors in HMRC systems which were not designed to deal with all the complexities of PAYE.

“The upshot for employers and employees is that they find that the PAYE tax and National Insurance Contributions that have been paid do not match those calculated by HMRC, despite their providing the information as requested.  As a result, they now face uncertainty over whether they have paid the right amount of tax.

“There needs to be some significant and urgent investment in the processing and back end software systems at HMRC which collect and process this data to generate the operational efficiencies envisaged when the whole RTI initiative was conceived.”

Wade told Accountancy Live: “At the moment, RTI just does not seem to be delivering information that is real. What we need is a thorough investigation of what has happened by a team which includes not just HMRC personnel but external specialists. Only that will give the necessary degree of confidence in the system that is vital for everyone who depends upon it.”

Natalie Miller, President of the Association of Taxation Technicians, says of RTI’s inaccuracies:

“This is an alarming revelation and further underscores the need for collaboration with external stakeholders, all of whom have a vested interest in the success of RTI.

“We have been drawing HMRC’s attention to the quirks and complexities of RTI in meetings and correspondence from its inception. We have also highlighted the significant burdens it places on employers and agents. What we are seeing now are real and serious practical problems for possibly many thousands of employees at a time when building confidence in the system is crucial.

“Some of those difficulties might have been avoided if HMRC had heeded advice from ATT and similar bodies at an early stage.

“In light of this latest revelation, we are calling for an urgent review of the RTI system to ensure that it is fit for purpose. This is essential because every employer and employee is entitled to know that PAYE is being dealt with properly. It is doubly important because the RTI system underpins the Universal Credit system that is being rolled out by the Department for Work and Pensions to replace certain state benefits.

“If, as HMRC’s reported comments suggest, the particular problem arose because employers had failed to send in final payment statements for the full 2013/2014 tax year, that suggests two things.

“Firstly, that the process is simply too complex for employers to understand. Secondly, that either HMRC know the information to be incomplete and are failing to address this before placing reliance on the information, or HMRC do not know the information is incomplete, which raises the equally worrying prospect that the system cannot identify when important information is missing.

“It is in nobody’s interest that RTI stumbles from problem to problem; that threatens its credibility. We all need a system that does what it says on the tin. At the moment, Real Time Information just does not seem to be delivering information that is real. What we need is a thorough investigation of what has happened by a team which includes not just HMRC personnel but external specialists.

“Only that will give the necessary degree of confidence in the system that is vital for everyone who depends upon it (employees, pensioners, employers, payroll bureaux, tax advisers, other parts of government and HMRC itself). The review’s remit should extend to other areas of RTI where systemic problems have been identified. The ATT and many other professional bodies stand ready to assist HMRC in that review.”

George Bull, senior tax partner at Baker Tilly, said that the RTI system had so far failed to demonstrate that it can put an end to the annual problem of incorrect tax demands and refunds. “It seems to me that in 2014, this is a pretty sorry state to be in.”

HMRC note to employers, professional bodies and business groups in full (published by Accountingweb)

“We are today emailing our stakeholders to explain that we are aware that a number of employees recently received a form 2013-14 P800 which was issued during our bulk 2013-14 End of Year reconciliation exercise.

“The 2013-14 P800 shows an incorrect overpayment or underpayment where the pay and tax shown on the P800 is incorrect and does not match that shown on their 2013-14 P60.

“The most common scenarios are where:

  • An incorrect overpayment is created as the 2013-14 reconciliation is based upon the Full Payment Submission (FPS) up to month 11 although the employment continued all year.
  • Where the year to date figures supplied are incorrect, for example where an employer reference changed in-year and the previous pay and tax is incorrectly included in the “year to date” (YTD) totals.
  • We have received an “Earlier Year Update” (EYU) and this is yet to be processed to the account.
  • There is a duplicate employment (often caused by differences in works numbers and other changes throughout the year)

“We are urgently investigating these cases and will look to resolve the matter in the next 6-8 weeks.

“We currently do not know the scale of the issue, but some large employers are involved, so several thousands of employees may be affected.

“Next Steps

“We are very sorry that some customers will receive an incorrect 2013-14 P800 tax calculation.

“We are urgently investigating these cases and will look to resolve the matter and issue a revised P800 to the employee in the next 6-8 weeks.

“Employers and their agents should not send any 2013-14 EYUs unless requested by us. We are aware that there are still some 2013-14 EYUs which we have yet to process to the relevant account.

“If an employee asks about a 2013-14 P800 which they think is incorrect, they should advise them:

  • Not to repay any underpayment shown on the P800
  • Not to cash any payable order they may have received
  • Employees will not be affected by the incorrect tax code as we will issue a revised P800 before Annual Coding.”

Comment

RTI is not a disaster but it’s clearly not in a fit state to support Universal Credit – another uncertainty for UC. When the National Audit Office reports on UC, as it is due to do in the next few weeks, it would be useful if it also reports on the state of RTI.

If it does so report, the NAO should not take at face value HMRC’s claims that the fault with RTI lies mainly with employers.

[The NAO will find that, even after the modernisation of PAYE processes, the systems still incorporate COP/CODA/BROCS software that dates back more than 30 years.]

Outsourcing costs in Cornwall escalate – and no deal signed yet

By Tony Collins

The estimated procurement costs of a mega-outsourcing project in Cornwall have risen sharply, not necessarily under the full control of the county council’s cabinet, and before any deal with BT or CSC is signed.

Meanwhile councillors are due to be told, in confidential briefings, that BT and CSC may claim back their costs so far, and are prepared to legally enforce that claim,  if no outsourcing deal is signed.

Such a legal claim, of potential suppliers suing a potential client, would be highly unusual perhaps unprecedented. 

Is Cornwall’s  cabinet using FUD – fear, uncertainty and doubt – to make councillors fearful of not  agreeing a deal with CSC or BT at a full council vote next week?

Papers published by Cornwall County Council show that a mega-outsourcing deal proposed by the authority’s ruling cabinet will be worth between £210m and £800m.

The full  council will vote on whether to proceed with a contract with BT or CSC on 23 October.

Before that vote the cabinet is expected to give confidential briefings to individual councillors. The briefings will focus on the promised benefits of signing a deal,  and the disadvantages of not going ahead.

The cabinet may tell councillors approximately how much money BT and CSC will claim, and if necessary take legal action to recover, if a deal is not signed, according to an interview the council leader Alec Robertson gave to thisiscornwall.co.uk

“The two bidding companies have spent a lot of money over the past couple of years and they will have a legal claim against the council for changing direction,” Robertson is quoted as saying.

“Councillors need to know the consequences. There is a lot of commercial confidentiality, but we wouldn’t be talking about small amounts of money.”

The council’s own budget for the outsourcing project so far has escalated. An independent panel set up as a “critical friend” to scrutinise the council’s plans for outsourcing has learned that the costs to Cornwall’s taxpayers of planning for the scheme were £375,000 in July 2011.

In March this year the “Single Issue Panel” members were told that the costs for the project would need to be increased from £650,000 to £800,000.

“The current estimate of the cost of the procurement process at the time of writing this report is £1.8m,” says the panel in its July 2012 report.

The £1.8m will be met from existing budget, says the cabinet in council documents.

On top of this, potential NHS partners in the deal have their legal costs.

The cabinet says in its written reply to the panel that the increase in costs is due in part to a “significant  increase in external support drawn in to support the procurement”, including specialist legal support and costs for consultancy KPMG, which has advised on the finance and client side support.

There has also been an “extension of scope” due to the proposed inclusion of telehealth/telecare. In addition there have been “project delays”.

Comment:

With the outsourcing-related costs to Cornwall’s taxpayers escalating before any deal with CSC or BT is signed, what will happen after the council is contractually committed to a long-term deal with one of the companies?

One reason there is no clear answer to this question is that so much of the council’s plans are based on assumptions that BT or CSC will commit contractually to providing up to 500 new jobs, saving money and achieving an IT-led transformation of services (while making a profit from the deal and recovering bid costs).

Cornwall’s cabinet seems confident that BT or CSC will enshrine all its promises in a contract free of caveats and ambiguities, and that the sort of legal dispute that has broken out in Somerset over the IBM/Somerset County Council joint venture Southwest One is unlikely to happen in Cornwall.

But isn’t Cornwall repeating Somerset’s mistake of not seeing that, behind the promises, assumptions, hopes and so-called contractual commitments,  the reality of withheld payments for poor service and the subsequent threat of legal action by the supplier is always there.

If Cornwall’s cabinet is already concerned about possible legal action from the bidders to recover their costs,  will the council be more confident about avoiding a legal action once the chosen suppliers’ lawyers have agreed a long and very carefully-worded outsourcing contract – a contract that may be different from the council’s proposed draft contract?

The Cabinet Office’s Major Projects Authority, under the enlightened David Pitchford, has a guiding principle that sets the coalition apart from previous administrations when it comes to avoiding disasters. That principle is to stop a deeply-flawed project cheaply before much more is spent and at risk of being wasted.  Ian Watmore, when permanent secretary at the Cabinet Office, put it well: “Fail early, fail cheaply.”

Will council leader be asked to stand down?

Cornwall outsourcing/partnership debate.