Fleets have been urged to get employees to double-check their payslips after warnings that a radical shake-up of the tax payment system has left tens of thousands paying the wrong amount of company car tax.

More than 40,000 workers are thought to have been hit by problems with HMRC’s new real-time information PAYE system, which was introduced in April.

The aim of the system was to slash red tape, as businesses can now report pay details to HMRC in real-time.

However, the launch has been hampered by issues, including the latest in which, in some cases, the computer system is incorrectly assuming workers have ceased employment and has stripped taxable benefits such as company cars and private healthcare from their PAYE code.

As a result, thousands are underpaying tax and will face potentially hefty bills when the system error is corrected.

New systems ‘working well for millions’

A spokesman for HMRC defended its performance, pointing to the fact that the problems affected a fraction of the employers who were benefiting from a more straightforward way of reporting employee earnings.

She said: “Real Time Information (RTI) is working well for millions of employers and employees across the country and we are constantly engaged with employers to help them.

“More than 1.3 million PAYE schemes have successfully started to report PAYE in real-time. We are aware of a problem affecting a very small number of employers and a small proportion of their employees.”

It’s not the first time that IT changes to HMRC processes have resulted in incorrect codes being issued. Fleet News reported a year ago of a range of issues ranging from incorrect P11D figures being used to cars being missed of the coding resulting in large underpayments which HRMC sought to reclaim.

Then, in a Fleet News poll, 80% of fleets said they had received an incorrect tax code from HMRC related to their company cars.

The latest problem is typically affecting smaller companies and, in addition to employees under-paying tax, has also occasionally increased the amount they pay.

Alex Henderson, tax partner at PricewaterhouseCoopers, said drivers should review payslips to check they were paying the right amount of tax.

He said: “The much-needed modernisation of PAYE has come with a few teething problems. Taxpayers should check their tax code and make sure all taxable benefits like company cars are being recorded. Underpayments of tax can quickly mount up to a large bill.”

One accountant warned that the complexity of setting up the new system meant it increased the potential for mistakes to creep in, especially in smaller companies with limited resource to cope with the changes.

He said: “In my view it will only potentially save time and cost for large employers, although I discussed this with the payroll programmer for a large supermarket and he claimed that setting up RTI had involved extensive costs.”

Relaxation of arrangements for SMEs

Earlier this year, HMRC announced changes to the RTI system with the scheme just two weeks away from going live.

Recognising some small employers who pay weekly, or more frequently, may need longer to adapt to reporting PAYE information in real-time, HMRC agreed a relaxation of arrangements for small businesses for the first six months.

Robert Downes, spokesman for Forum of Private Business, said during the preparations for launch there were hints that HMRC realised many smaller companies weren’t fully prepared for RTI.

He added: “This does seem the sensible course of action, because a tax system in meltdown is in nobody’s best interest, and no doubt many firms will now be breathing a sigh of relief.

“It will though now add another layer of confusion around a subject which is already as clear as mud to many SMEs.”

RTI explained

From April 2013 there has been a new way to report PAYE in real-time, Real Time Information (RTI).

Under the present PAYE system, employers tell HMRC what deductions they have made from employees’ pay
at the end of the year.

Reporting PAYE in real-time is meant to ensure employees’ tax records are accurate, so they won’t face big PAYE overpayments or underpayments at the end of every tax year and ensure correct benefit or tax credit payments every month.

PAYE itself has not changed – just the way, and how often, employers send PAYE details to HMRC.

Instead of sending all PAYE details to HMRC in one go, at the end of the year, from April 2013 employers have to:

• Send details every time a payment is made
• Use payroll software to send the details electronically
• Send the details as part of their normal payroll process.

When companies provide a car to an employee or withdraw one without replacing it, they can continue to report this online using P46 (Car).

It warns that employers should check that information about their employees is accurate and up to date.