Reform of the UK PAYE system now seems imminent following the publication of the consultation document “Improving the operation of Pay As You Earn: Collecting Real Time Information”. The key idea is that more employee data will be provided to HMRC at the time the payroll is run, rather than annually-the P35 would be eliminated. A further idea of Centralised Deductions for PAYE has been suspended, at least for the time being.

PAYE real time information means employers will send HMRC information about tax and other deductions from employees’ pay when the employee is paid, rather than at the end of the year as at present. The consultation document offers a reasonably detailed outline of how HMRC see real time information working. The electronic transmission of data would (of course) be mandatory, most likely using Bacs.

Initially, the thinking on PAYE reform included the concept of Centralised Deductions. This in effect would have involved HMRC more directly in the payroll tax collection process. Deductions from employees would have been calculated in parallel with the provision of the Real Time Information from the employer. Centralised Deductions have now been parked, at least until the Real Time Information project is properly up and running.

Introducing the consultation, HMRC have stated that they expect all employers to be using the new system by October 2013.

Responses to the consultation document are due by 28 February 2011. The consultation document can be found at http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_030851