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OTS recommendations to improve PAYE for small businesses

24 May 2019

The Office of Tax Simplification has recently published its report “Simplifying everyday tax for smaller businesses: a further business lifecycle review”. Although the review covers all relevant business taxes, many of the significant recommendations arising from the report focus on how PAYE could be improved to make life easier for small businesses. 

Strategic focus on PAYE

The OTS report points out that although PAYE accounts for nearly 28% of all tax revenue collected by HMRC, it is unhelpful there is “no one person with overall strategic ownership or oversight of PAYE and that this makes it harder to target and implement system-wide changes and maintain a “future vision for PAYE”.

As there is no long term plan to deliver improvements to PAYE, the OTS suggests that HMRC build a five year road map to implement planned improvements – based on research it has already carried out (eg improvements identified in The RTI post implementation review) and on ongoing research with employers and their agents.

Perhaps unsurprisingly, the OTS also suggest that it carry out further research to consider the fit between the PAYE/RTI processes and modern work patterns: it points out that the system “does not handle the fluidity of the modern workplace very well” (eg mid-month job changes). The OTS also wants to examine options to simplify and streamline the PAYE and RTI as well as working on future-proofing them.

First employee problems

The report clearly sets out the issues that can arise when a small business takes on its first employee – making an interesting parallel between the costs and administration of taking on an employee and engaging a contractor. The overall feedback was that “payroll was too complicated and risky for small businesses to do themselves” and there was clear need for simplification. Interestingly, the new rules on off-payroll workers from April 2020 will not apply to small businesses, so, without significant simplification, the attractiveness of using contractors is likely to remain.

Using agents for change

Many small businesses rely on advisers “agents” to carry out administrative tasks for them. The OTS points out that while HMRC seems to recognise the importance of agents in helping taxpayers to get things right first time, there are frequently systems issues that limit the support that agents can give. It points out that despite the fact that HMRC’s ‘Agent Strategy’ includes “enabling agents to see the same information as their clients and carry out any tax transaction their client wishes them to do” – it is still the case that agents “sometimes have to ask their clients to do things” because of lack of access.

The OTS recommends that HMRC appoints a senior official to ensure its agent strategy gets the most out of its relationship with agents and that it should build agent needs into system design and improvement processes. Again it suggest a “roadmap setting out dates for implementation of the key improvements”. 

Read the full OTS report.

Employer Essential Index