And a Happy New Year...

Another year over; a new one just begun. Brad Chick, legislation consultant, LogicaCMG, looks forward and back

A new calendar year; and a little early, perhaps, to think of the new tax year? Maybe not. There have been a couple of changes this year and although you have now mastered them and set up procedures and software to manage them you now have to prepare to include them in your year-end reporting.

As you read this, those who run monthly payrolls are already preparing the payroll for month 10. Depending on your system, this only leaves two more payroll runs to enter any corrections. Have you reconciled the previous nine months or did December's reconciliation get postponed because you had to do four weeks work in three weeks?

The best time to do reconciliation is immediately after the payroll. The second best time is before tax year-end.

Two of the most common causes of errors are manual payments and manual editing. Ironically both of these are intended to correct errors. The best way to avoid errors in the first place is to allow enough time to check everything thoroughly. Unfortunately the earlier the cut-off, the more requests you will get for manual payment. The real world does not stand still even for payroll.

Strict cut-off, which is enforced by senior management, will contain the problem. Perhaps the long-term solution is to introduce more automation to reduce the 'lying time' between cut-off and payment dates.

The transfer of employees between payrolls or departments is also a source of error. Both parties need to be clear on which payroll retains and reports the year to date figures for the period up to the date of transfer. It is easy to report the figures twice.

There are a formidable number of items to be reconciled for this year-end:

PAYE, National Insurance, Statutory Sick Pay, Statutory Maternity Pay, Statutory Adoption Pay, Statutory Paternity Pay, Working Tax Credits and Student Loans.

The list grows year by year and may not have finished yet.

National Insurance will require a closer look this year. The immediate change is that contracted-out contributions are to be reported net of rebates.

In previous years, the contributions and rebates have been reported separately. This introduces the possibility of a negative figure for employer contributions. Where an employee in contracted-out employment is paid below the employment threshold but above the lower earnings limit in a pay period, both the employer and employee rebates will be entered in the field for employer's contributions. It is possible over the year for the total of rebates to be greater than the employer contributions, resulting in a negative figure to be entered on returns at year-end.

The three fields for recording earnings will not affect the reconciliation of payments to the Revenue but will require attention. The National Insurance Recording System uses these fields for a series of validation checks.

For instance, Box 1a on the P14/P60 records earnings at the lower earnings limit. This is an all or nothing field. If an employee has earnings for National Insurance purposes of less than £77 weekly or £334 monthly then nothing should be recorded. Hence the entry on forms P14 should be an exact multiple of £77 or £334 unless the employee has changed pay frequency during the year. Any employee with a figure, which is not a whole multiple, may warrant further investigation.

This is also a good opportunity to review missing or temporary National Insurance numbers ready for next year. From 2004/05 temporary numbers will not be accepted when filing end-of-year records electronically.

Where you do not hold a valid number, the field must be left blank but the gender and date of birth must be entered in the relevant fields. Deviation from this will cause failure of the submission. If this happens close to the last submission date of 19 May, you may not be able to correct entries in time to resubmit before the deadline.

A cautionary tale to finish. It may not be in your best interests to be too efficient.

Some years ago a payroll bureau made a particular effort to clear as many of their client end-of-year returns as early as possible. At the beginning of March they concentrated on the smallest of their payrolls. As these had the fewest number of employees they had the fewest queries.

The payrolls were run, checked and issued early to clear the decks for the larger and more complicated payrolls. As a result some of the P35s were signed by clients and sent to the Inland Revenue on 6 April. On the 12 April demands were received from the Inland Revenue Accounts Office for apparent underpayments for the past tax year. An automated comparison of the amounts of PAYE and National Insurance declared on the P35s to the amounts remitted during the year showed underpayments, which just happened to be the same amount as the period 12 remittance. A discreet phone call to the Accounts Office reminded them that the period 12 remittances could be made up to 19 April. An equally discreet apology was received.

KEY POINTS

• Prepare an end of year checklist and update it every year
• Reconcile the payroll each month against the payments due to the Collector of Taxes
• Box 1a should be multiples of the lower earnings limit or zero
• There maybe negative amounts in the employers' NI fields due to NIC rebates
• Chase up missing NI numbers