Britain's New Tax Reporting System Draws CriticismBritain's New Tax Reporting System Draws Criticism

A key element of Universal Credit, the U.K.'s impending national unified welfare and benefits system, which will allow tax authorities to track workers' earnings in real time rather than retroactively, is drawing strong criticism.

To make Universal Credit work, the country's tax gathering authority, HMRC (Her Majesty's Revenue & Customs) needs constant accurate data feeds and must be flexible enough to adjust payments on an immediate basis – for example, to handle situations in which claimants secure additional hours of part-time work. Hence the PAYE RTI (Pay-As-You-Earn Real-Time Information) system, one of the most fundamental changes to British payroll reporting requirements for 70 years, affecting the 1.4 million U.K. businesses that have more than one employee on their roster.

As of April 6, any firm with 50 employees or more must provide employee PAYE, national insurance and student loan information to HMRC every time they pay an employee. This could be good news for British taxpayers, who might look forward to more accurate dealings with the taxation authority. HMRC took the wrong amount of tax from one in six taxpayers last year, with 1.6 million wage earners deemed to have paid too little tax and 3.5 million having overpaid and getting a rebate.

The problem is businesses say they can't cope with the filing demands of the new system. This is compounded by the fact that the HMRC system gateway required to log data with the department has been offline for maintenance for the past few days -- and 55,000 civil servants were out on industrial action on Monday.

[ Will the new Universal Credit system lead to an increase in fraudulent claims? Read British Worry Of Fraud With New Social Security System. ]

Though full compliance for small and midsized businesses (those with fewer than 50 employees) doesn't kick in until October -- when Universal Credit is also currently slated to go live -- many businesses are also reportedly fearful of the complexities of the new arrangements, which oblige them to report all wage payments to staff as soon as they make them. (Previously they performed this reporting only once, at years' end.)

The Chartered Institute of Taxation claims said that many British SMBs are seriously considering shutting down in the face of RTI, a system it describes as "a route to insolvency." Adam Marshall, a director of the British Chambers of Commerce, said, "Reporting PAYE in real time is a massive change to the way that businesses operate across the U.K. HM Revenue and Customs must not underestimate the potential for problems to arise, and must provide firms with ongoing support over the coming months as they adapt to the new system."

Marshall continued, "We are concerned that the new system and future penalties could hit many well-intentioned businesses, especially since there is no transition period from the old system to the new. We remain concerned PAYE RTI will generate new burdens for business, as government agencies use the system to ask for more and more information from employers. Employers are committed to obeying the law, but if they are treated as data-collectors by government, they will be distracted from the task of creating growth and jobs."

For a sense of the burden Marshall is concerned about, here's a sample of some advice for business owners from the Accounting Web information service: "You will need to collect all the traditional information from their P45 (if they have one) and enter it into your payroll system before you pay them for the first time. This information should include an indication of the employee's employment situation -- statement A, B or C, which was previously included on form P46. This category should be included in the first FPS that includes them. If you haven't retrieved this information from your new employee's P45, include statement B (this is their only job, but they may have received income from other sources). You should also only include pay and tax figures from their employment with you, not the year to date figures…"

This week also saw a half-day walkout at HMRC offices and call centers by members of the PCS union, specifically aimed at "disrupting the start of the new tax year and the introduction of PAYE real-time information." The union says it is protesting cuts to its members' pay, pensions and conditions.

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