Tax Year End Procedure in the United Kingdom - Case Study Example

Tax Year End Procedure (U.K Jonathan Maxwell March 2006 SPD is a growing company and with growth there has been increased pressure onadministration staff to keep pace with the new record keeping and audit requirements that arise from moving from a small to a medium size business. In particular some employees job descriptions have changed to meet demand caused by the growing business. This paper explains the Tax Year End Process that will need to be put in place in relation to the company payroll. The paper will address the necessary procedures, deadlines and person responsible for a variety of tasks to ensure that the company meets compliance with U.K. Inland Revenue and HM Revenue and Customs legislation. The company payroll is one of the largest expenses a company may have and as such it is important that accurate and complete records should be kept on a daily basis to ensure that the year-end procedures can be carried out with the minimum of stress or inconvenience to payroll staff. This report addresses five different areas where payroll procedures need to be explained so that during the end of year cut-off and rollover procedures there is a minimum of adjustment that might need to be made to existing daily records. The five areas contained in this report include the reconciliation process, the clear-down process, submission requirements and deadlines, a general checklist and a review of procedures. Reconciliation Process The most helpful source of information on day-to-day payroll procedures is an Employer's Help Book (E13, 2005) that is published by the Inland Revenue Department. This booklet explains how to work out and record PAYE and NIC's (form P11); The procedures necessary when a new person is employed; what procedures should take place when an employee leaves the company; the correct procedure for changing an employee's tax code within a tax year as well as information on other different changes that might occur within a tax year such as changes in employees circumstances (reaching the age of 16, pension schemes, what to do if an employee dies and changes to insurance schemes) as well as comprehensive information on how to apply the Working Tax Credit to wages and how a company can take out Student Loan Deductions from an employee's weekly wage entitlement. One of the most important payroll procedures is the allocation of a new employees tax code, as this code will determine how much tax this person should be paying in accordance with his or her personal circumstances. There are a variety of codes that can be used which are generally noted with a letter (L, P, T, or Y) and one or more numbers. The Inland Revenue Department has more detailed information on how these codes should be allocated and they advise that a tax code for an employee should never be changed within a financial year without approval from the department. There are a number of different wage figures that have to be accumulated throughout any financial year. These include individual PAYE and gross earning figures for each employee, plus the amount of money that has been added to or deducted from individual pay entitlements for insurance and pension schemes, clothing allowances, travel allowances, working tax credit and other benefits and allowances. It is the company's responsibility to ensure that the calculations of weekly pay amounts and the recording of accumulative pay figures throughout the year are accurate especially in terms of PAYE as it is this amount that the company will need to pay to the Inland Revenue department at the end of the financial year. Most payrolls are now completed using a payroll software program. These programs have inbuilt processes in them that ensure that the necessary total figures are accumulated on a monthly and yearly basis. Supervisory checks at this stage of payroll processing should include checking weekly wage totals on a weekly basis before payments are made to employees, reconciling the weekly pay figure totals with those accumulated for the month/year and ensuring that any new employees are entered onto the payroll system accurately. Clear-Down Process The clear-down process is where all of the payroll figures for the year are accumulated, and then tabulated to provide the data for the end of year payroll report. At this stage of the proceedings payroll personnel need to ensure that the final pay for the year has been processed and deemed accurate, and that the year-to-date figures tally with the sum of the monthly figures previously recorded. There are a number of different items that need to be cleared off for the financial year including; Gross pay to date Gross PAYE to date Gross SSP to date Gross Deductions to date Gross Allowances to date The Inland Revenue Department also require that each company complete an End of Year Summary form (P14) for each employee (current and historic) that has been paid by the company during the relevant financial year. Student Declaration forms (P38[S]) for students who may have been employed during holiday periods and Employee Supplementary Returns (P38A) also need to be completed for any employee that was paid during the financial year but for whom a P14 was not completed. Other returns that must also be completed during the end of year reporting process include an Employees Annual Return (P35), an Employee's Certificate of Pay, Income Tax and NICs (P60) an Expenses Payments and Income from which tax cannot be deducted for the financial year (P9) and/or an Expenses and Benefits Form (P11D). Finally if applicable a form (P11D[b]) Return of Class 1A National Insurance Contributions, Return of Expenses and Benefits: Employer's declaration must also be completed if the company is liable to return any expense payments or benefits. Because the closedown period is a complex and busy time of the year, it is advisable that a trial run of the close off is completed two weeks before the end of the year date. Although the year to date figures will not be complete (because of two pay periods still to process) this trial run will allow accounting staff to run a check on figures generated by the payroll software program to ensure that the program is working accurately, and that all of the information required for end of year processing is available through generated payroll reports. Submission Requirements and Deadlines The HM Revenue and Customs Service have provided an Employer Help Book (E100, 2006) with the complete list of deadlines that companies need to adhere to during the Year End Tax Process. The final date for the tax year 2005 - 2006 is the 5th April 2006 however there are a number of different cut-off dates that apply to different parts of the payroll processing. For example 31st March 2006 is the last date that a company should pay any Working Tax Credit to its employees. By the 19th April 2006 all PAYE and Class 1 NICs payments by the company should be cleared funds in the Inland Revenue accounts otherwise interest can occur on late payments. The 22nd of April 2006 is the last date that these PAYE and Class 1 NICs payments can be made by approved electronic payment methods. By the 19th May 2006 all P14s and P35s should be received by the HM Revenue and Customs office, with the cut off occurring at midnight on that day. Any forms received after this time will be subject to penalty payments. By the end of May (31 May 2006) all employee's that were employed on 5th April 2006 should have received their P60 forms for their own accounting records. The 6th July 2006 is the last day that the HM Revenue and Customs office will receive P9D and P11D forms or any P11D(b) forms. It is also the last day that a copy of any P9D, P11D or similar forms should be handed to employees that are affected by this information. By the 19th July 2006 all payments of Class 1 NICs should be made to the Revenue office although this is extended to the 22nd July 2006 if the payment is to be made by electronic methods. The HM Revenue and Customs Office is very clear on the fact that any late filing of these payroll records will receive penalty payments and interest on monies due. To ensure that the company accountant can file these papers ahead of schedule it is vitally important that all relevant documentation needed to file these forms are included in the Year End Payroll report well in advance of the final deadlines for receipt of this information. It is anticipated that the payroll staff and supervisor will ensure that all of the totals for the year ending, both for payroll and for individual employees are checked and verified before the end of year report is collated for the accountant. The payroll supervisor should ensure that he or she is also available to answer to the accountant should any queries arise from this end of year report. General Checklist Because the accuracy of the payroll data is so important to the administration and managerial department it is recommended that the payroll supervisor oversee a number of quality checks that can be made with regards to employee information, payments and benefits due. Any forms completed by new employees should be signed, dated and filed appropriately for ease of access if queries arise. Any tax codes, Working Tax Credits and insurance and pension deductions must be applied to the employees pay entitlement accurately. It is the company's responsibility to ensure that all forms are completed accurately and that all codes assigned to different aspects of individual pay entitlements are applied correctly. There also needs to be checks made once a new employee's details have been added to the computerized payroll program to ensure that data has not been entered incorrectly, especially with relation to coding for tax and insurance purposes, and again this checking should be the responsibility of the payroll supervisor. In the event of any queries arising from individual employee entitlement to benefits, or Working Tax Credits the Inland Revenue department should be contacted at the time for help with the query, rather than leaving the problem to be tackled during the end of year tax process. If the supervisor believes there is an in-house problem with the way the payroll is being processed then these issues should be taken to the company Accountant and/or senior management. Review As payroll manager for SPD Ltd I am pleased to find that for the most part the payroll processing for the company has retained its accuracy and efficiency despite company growth and expansion. However there are two areas that I believe should be reviewed during the payroll processing - the checking of codes for new employees as they are being put on the payroll software program, and the checking of year to date figures throughout the year. The biggest problem that can occur when placing new employees on the payroll system is the allocation of codes that apply to individual personal circumstances. Although the HM Revenue and Customs Office has a number of publications to help the employer make sound judgments regarding tax and insurance codes, I do think this is one area where the Accountant should check the codes allocated to individual employees both before and after the new employee has been entered into the system. If there is any doubt as to what codes might apply to a new employee then the local Revenue office should be contacted for advice. The reason this is such an important part of the payroll process is that the company can be held liable if the wrong codes have been used for individual payment entitlements, and a mistake in this area could also see the enforcement of penalty amounts and interest payable by the company to the Revenue office if incorrect amounts by the company and put through to the Revenue office. Another area where increased supervision could be appropriate is in the end of year tax return preparation. The forms submitted to the Revenue office are completed based on the end of year report generated by the payroll program. To ensure continued accuracy of information held in the payroll database I would propose completing a trial end of year report every three months throughout the year, so that any problems that might come to light after the year end reports have been completed could actually be identified before the busy end of year period. In cases where codes have been incorrectly applied or where data has been input incorrectly payroll staff will only have to review three months worth of information to find the era rather than data from the previous twelve months and I believe that although this new system may increase the workload during the year, that the savings of time and resources at year end will make the extra effort through the year more worthwhile. Each of these trial end of year runs, occurring quarterly rather than annually, will be completed within two weeks of the roll-over date so that only two pay periods will be affected through any incorrect data entry. The payroll office system will need to be re-vamped. At present SPD Ltd employs three payroll clerks who all work on different aspects of the weekly payroll processing. Although all three clerks are capable of completing all tasks on the weekly payroll only one clerk has experience with the end of year procedures. As payroll manager of SPD I would like to see the other two clerks trained on end of year procedures as well so to avoid any delays through the training of new staff should any of the current employees decide to terminate their employment. I also think there should be more input from the company Accountant into what figures require checking on a weekly and monthly basis to ensure more accuracy at years end. Finally I would like to see all three clerks are given the opportunity to study a wealth of literature that is available through the HM Revenue and Customs Office. Much of the technical and deadline information in this report were gleaned from Employers Help Books 10 and 13. Other Help Books such as Starting the tax year (E11, 2005) and similar publications could increase the skills and knowledge base of the current payroll administration staff, which would be a clear advantage to the company in terms of payroll processing policy, efficiency and accuracy. References HM Revenue and Customs (2006). Finishing the tax year up to 5 April 2006: Employer's Help Book E10. HM Revenue and Customs Office accessed March 9, 2006 at http://www.hmrc.gov.uk Inland Revenue (2005). Day-to-day payroll: Employer's Help Book E13. HM Revenue and Customs Office accessed March 9 2006, at http://www.hmrc.gov.uk Inland Revenue (2005). Starting the tax year from 6 April 2005: Employer's Help Book E11 accessed March 9 2006 at http://www.hmrc.gov.uk Read More