Year End Checks

Simon Parsons, legislation and payroll strategy product manager, Ceridian Centrefile , explains how to avoid common errors in submissions to the Inland Revenue

At Ceridian Centrefile, we have been filing end-of-year returns on behalf of employers for over 30 years. On this basis, I am presenting a guide to avoiding common mistakes that employers can make.

One most important task is for every employer to ensure that each payment period balances with the payments made to the Inland Revenue.

ECONs & SCONs
Ensure that you are using the correct National Insurance contributions letter for each employee. Remember, the last digit of the National Insurance number is not the category letter that should be operated for NICs (although confused employers occasionally apply as such).

An employer that has any employees on contracted-out NICs letters D, E, F, G, L, or S (and any mariner equivalents) must ensure that a valid employers' contracted-out number (ECON) is used on the P35, and the headers of any P14.

If you have multiple ECONs for a single tax reference scheme, then only one can be reported. For employees on letter F, G and S, then you need to report the scheme contracting-out number (SCON) which are only reported for contracted out money purchase schemes, known as COMPs.

Personal pension schemes
Confusion abounds with regards to personal pension schemes including stakeholder and group personal pension schemes. Often employers are led to believe that such schemes either:

a) Qualify for tax relief in the payroll - they don't, or

b) That the scheme attracts contracted-out NICs through the payroll - they don't.

With the exception of COMP stakeholder schemes which are not personal pensions, schemes including group personal pensions and stakeholder personal pensions operate not contracted-out A rate NICs through the payroll, unless a reduced rate NI certificate CA 4139 is held. In this case, operate B.

Some employees may contract out through the pension provider with an 'appropriate personal plan' and the scheme may have an ASCON number allocated. Even still, the only correct operation of NICs is under not contracted out contributions (letter A) as the provider reclaims rebates directly from the Inland Revenue National Insurance Contributions Office and not through the payroll operation.

NT tax codes
There are three basic reasons why employers operate NT tax codes:

1. The employee is not liable to UK taxation,
   
   
2. The employee's earnings are below the tax threshold. If NT has been operated for this reason then you need to check that for every earnings period they did not actually earn over the threshold. For employee in this category it would be better to operate the standard emergency tax code 461L on a week 1 month 1 basis (or 474L from 6 April 2004).
   
   
3. The employee is a student who has signed a P38(S) declaration. Any employees who qualify under the P38(S) do need checking to ensure that their earnings have not exceeded the annual single person's allowance of £4,615. If they have, then tax should have been deducted on any earnings exceeding this using a code of 0T on a week 1 month 1 basis.

Magnetic media and EDI permit numbers
A common problem encountered at IR NICO is the incorrect use of the permit numbers when an employer's payroll supplier has changed. This is the authority to submit the end of year return either by magnetic media or EDI and is usually associated with the submitter as well as the employer.

When employers changes suppliers/submitters, then often they believe that the existing permit number can be used. The magnetic media section in Longbenton IR NICO issues permits, not the local office. When an employer changes supplier often a new permit number is needed.

Fortunately this is the last year-end where employers will need a permit number.

A and H suffix tax code reminder
There should really be no employees with an A or H tax code suffix this year-end. If you have any, contact your tax office urgently. Although A and H tax codes are not invalid (just not used) for the 2003/04 tax year, they are invalid for the 2004/05 tax year and will cause rejection of end-of-year returns.

And finally
For magnetic media and EDI filers, this is the last year that some of the anomalous values will need recording on the totals record. Remember that the SMP recovery value on the totals record must be 92% of the accumulated SMP payments (or the submission will be rejected) and not an accumulation of the individual employee recovery values, or the value reported on the P35MT itself.

This is also the last year the SSP percentage threshold recovery value will need to be reported on the totals record as well.

End of year checklist

• Health check your payroll data (ECONs, SCONs, NI ratios, negative statutory values, directors)
  
  
• Issue NI trace to IR NICO for missing NINOs and employees with TN NINOs (remember that TN numbers are no longer from 6th April 2004).
  
  
• Check all contracted-out NI cases that they actually qualify for the reduced contribution rates
  
  
• Check Student NT tax codes and the validity of the P38(S)
  
  
• Check non-standard NI codes (such as reduced rate B, E, G and retirement rate C and CA2700 cases using J, L or S)
  
  
• Check missing SCON numbers for F, G & S NICs cases
  
  
• Don't forget to recalculate directors NI on an annual earnings basis for the final payment
  
  
• Check negative tax and NI entries. You can have negatives but check that these have not been entered in error