The UK's leading contractor site. Trusted by over 100,000 monthly visitors

Contractor guide to HMRC’s Real Time Information (RTI) annual scheme

Limited company contractors, or their accountants, can now submit their Real Time Information (RTI) payment submission to HMRC annually, rather than monthly as was previously the case.

However, according to James Abbott, owner and head of tax at contractor accountant Abbott Moore, many contractors may choose to continue with monthly submissions to avoid complications and unwelcome attention from HMRC, and because of the flexibility it offers.

“The ability to submit an RTI payment submission annually may save limited company contractors and their accountants some paperwork,” notes Abbott, “but it can cause problems with cashflow and HMRC, and reduce a contractor’s tax flexibility.”

Who can qualify for the annual scheme?

RTI was introduced so that an employer must report to HMRC on or before the date it pays an employee how much is being paid, who to, the number of hours worked and the income tax and National Insurance Contributions (NICs). HMRC’s objective is to allow for changing patterns of employment and reduce Pay As You Earn (PAYE) errors.

If all the employees of a business are only paid once a year and all at the same time, says Abbott, rather than file monthly the business can file a single RTI payment submission to HMRC on or before the date that the employees are due to be paid.

“A simple call to HMRC’s Payment Enquiry line on 0300 200 340 is all that’s required to put a contractor’s company on the annual scheme,” continues Abbott.

Why the annual scheme may not work for contractors

But he says that there are a number of reasons why a contractor may wish to continue to pay themselves monthly, and warns of the complications that may arise from annual payments.

“Contractors might wonder why they can’t simply continue to pay themselves monthly, build up a director’s loan, and clear it after 12 months by declaring a salary and telling HMRC at the end of the year.”

Firstly, Abbott highlights that there are complications with beneficial loan interest when racking up director’s loans. He also suggests that HMRC can argue that your salary was declared when it was physically paid if cleared by a salary, so the contractor should have made 12 submissions and paid any PAYE/NI over accordingly.

And the penalties for incorrect PAYE calculations have always been steep and specific penalties for incorrect RTI submissions come into play April 2014 onwards.

Making an annual payment in month 12

“Some contractors may be able to last the whole year without needing to pay a monthly salary and then pay themselves at the end of the year and make a single RTI payment submission,” explains Abbott.

“This means a contractor cannot draw a salary until month 12. But in practice most contractors need to pay themselves both a salary as well as any dividends to pay for living expenses. Paying themselves in instalments leads to issues with loan interest and HMRC, as already described.”

Making an annual payment in month one

But what about making a single payment in month one? This also has its drawbacks, as Abbott describes: “If you make the payment and submission in month one, then you can’t change your mind later in the year and say you want to repay some salary.

If you make the payment and submission in month one, then you can't change your mind later in the year and say you want to repay some salary

James Abbott, Abbott Moore

“A contractor might wish to do this if, for example, they were offered a permanent job and wanted to close down the company using Section 1030 to extract any cash in the company tax efficiently. If they have already paid it as salary, they may end up paying more tax than they should.”

Abbott confirms that, because most accountancy software can easily deal with batched payment submissions, a contractor could simultaneously submit 12 payment submissions all in month one to reduce paperwork during the year. The returns would be for salary payments physically made monthly over the next 12 months, but HMRC would be told of all 12 in the first month.

“But again, if a contractor changed their mind and tried to change the payments later in the year, then the contractor would need to amend the submission for the later months.

HMRC could even argue that the contractor in fact did not change their mind, making them liable for PAYE/NI on higher salary payments than they wished. “I have seen this argued by HMRC,” warns Abbott, “unsuccessfully I might add, even where a freelancer paid a higher monthly salary in earlier in the year and reducing the monthly amount later in the year!”

Contractors paying a salary that attracts deductions for income tax and NICs below £1,500 per month have the option of actually paying HMRC the PAYE and National Insurance quarterly rather than monthly, if they inform HMRC first.

Abbott concludes: “The danger is that something which seems like a time-saving measure, such as the annual RTI scheme, may turn out for some contractors to be more expensive and awkward to deal with than just filing payment submissions monthly.”

Published: Monday, 23 September 2013

© 2024 All rights reserved. Reproduction in whole or in part without permission is prohibited. Please see our copyright notice.