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PAYE procedures for payments due on Good Friday 2007
HMRC issues extra-statutory concession to prevent payroll confusion
Leeds, UK: In our newsletters in October, we explained the potential for considerable payroll confusion over HMRC's announcement about the handling of wages and salaries that are due for payment on 6 April 2007. As that day is a bank holiday (Good Friday), it will not be possible to pay wages or salaries into employees' bank accounts on that day and employers will have to make the payments a day earlier.
PAYE procedures require wages paid on 6 April 2007, the first day of the 2007/08 tax year, to be taxed as at week 1 of the new tax year. However, if a weekly payment is made the day before, on 5 April 2007, it will be the 53rd payment of wages in the 2006/07 tax year and would have to be handled according to the special PAYE procedures for week 53 payments. It could even be the 27th fortnightly payment or the 14th four-weekly payment in the 2006/07 tax year, requiring the tax to be calculated as a week 54 or 56 payment. And, because the payday falls in month 12 of 2006/07, the tax and NICs deducted would be due for payment to the HMRC Accounts Office by 19/22 April instead of 19/22 May.
That is confusing enough but the real complication arises when the next weekly wages are paid on Friday, 13 April 2007 (sic). That date falls in week 2 of the 2007/08 tax year and the payment would have to be taxed as at week 2, even though it is the first payment in the new tax year. As there has been no payment for week 1, the payment for week 2 for employees taxed cumulatively would enjoy two amounts of 'free pay'.
It is also possible for the problem to affect monthly-paid employees. If a monthly-paid employee is normally paid on the 6th of the month but, in April 2007, the payment is made on the 5th, the employee will have received thirteen monthly payments in the 2007/08 tax year and the tax and NICs on the 13th payment would be due to the Accounts Office by 19/22 April. The subsequent monthly payment, on 6 May 2007, would be taxed at month 2, even though no payment had been made in month 1. It is, however, uncommon for monthly-paid employees to be paid so early in a month.
The problem is that most computerised payroll systems will not recognise these situations and, unless the developers make some significant changes to their systems, the payments made on 5 April and 13 April will not be taxed correctly under PAYE procedures and payments will be made to the Accounts Office a month late and for the wrong tax year.
This situation has never arisen before in PAYE history - the last time Good Friday fell on 6 April was in 1928. It will occur again in 2012 but then not again until 2091.
We highlighted these issues in our early newsletters and reproduced a letter we sent to HMRC on 9 October suggesting that the problem could be resolved by allowing employers to treat the payments made on 5 April as if they were made on 6 April. We recognised that, for this to be possible, HMRC would have to make an extra-statutory concession so that the strict PAYE rules would not apply in these particular circumstances.
Since making our approach to HMRC, many other interested parties have taken up the issue, including the Institute of Payroll Professionals (IPP) and most payroll system developers. A meeting to discuss the subject was hosted by HMRC on 22 November, following which HMRC announced that it would reconsider its position in the light of the comments received.
On 5 December, HMRC wrote to payroll system developers with the following guidance:
Good Friday 6 April 2007
We've been asked to give further guidance on the operation of PAYE and NIC where pay falls due on Good Friday 6 April 2007 (the first day of the new 2007-08 tax year) but is paid earlier and so strictly falls in 2006-07.
The guidance we issued in September raised a number of practical difficulties for some employers and could lead to inconsistent PAYE deductions for employees at the beginning of the tax year. It is therefore supplemented by the guidance set out below. This will also apply when Good Friday next falls on 6 April in 2012.
This guidance does not replace or alter the existing guidance in booklet CWG2 about regular paydays falling in week 53 of the tax year.
Operation of PAYE & Class 1 NIC when the regular date for payment is a non-banking day
When a regular pay day falls on a non-banking day (Saturday, Sunday or Bank Holiday) and because of this the payment is made on the last working day before the regular pay day, the payment may be treated for PAYE and Class 1 NIC purposes as having been made on the regular payment day.
For example:
- Pay due on Bank Holiday Friday 6 April 2007 or Bank Holiday Monday 9 April 2007 (tax year 2007-08) but paid on Thursday 5 April 2007 (tax year 2006-07) may be treated for PAYE/NIC purposes as being paid on 6 April and 9 April respectively.
- Pay due on Sunday 6 April 2008 (tax year 2008-09) but paid on Friday 4 April (tax year 2007-08) may be treated for PAYE and NIC purposes as being paid on 6 April.
- Pay due on Saturday 6 January 2007 (tax month 10) but paid on Friday 5 January 2007 (tax month 9) may be treated for PAYE purposes as being paid on 6 January.
This guidance will be issued shortly on HMRC Internet and included in the December edition of the Notes for Software Developers.
The effect of this welcome and satisfactory announcement is that, in effect, employers need do nothing different over the tax year end except arrange for their employees to be paid into their bank accounts on 5 April 2007. Their payroll systems will automatically calculate the payment at week 1 (or month 1) and the following payment as week 2 (or month 2). The tax and NICs deducted on 5 April will not be payable to the HMRC Accounts Office until 19/22 May.
It should be noted, however, that the wording of the concession is not composed simply to address the specific Good Friday problem in 2007 and 2012. It also applies to situations where a payment due on a Saturday, Sunday or Monday bank holiday is brought forward to an earlier date. This is unlikely to affect weekly-paid employees because, although they may be paid in cash or by cheque on a Saturday or Sunday, their wages cannot routinely be paid into their bank accounts on those days.
However, monthly-paid employees, in some fairly unusual circumstances, could be affected. As the problem only arises if the Friday on which the payment is made falls in the preceding tax month, it could only possibly occur on pay dates such as those mentioned in the second and third example of HMRC's concession, namely on the 6th, 7th, 8th or 9th of a month - very unusual pay dates for monthly-paid employees.
Although HMRC's concession removes the prospect of employers with a Friday payday having to handle a week 53, 54 or 56 payment for 2006/07, they should not forget that they will nevertheless have a normal week 53, 54 or 56 situation to manage at the end of the 2007/08 tax year. There are 53 Fridays in 2007/08. There are also 53 Saturdays in 2007/08, so employers who pay wages on Saturdays will also have to handle a week 53, 54 or 56 payment at the end of the next tax year.
Ends
The preparation of this news release was supported by HRD & Payroll Solutions, the leading payroll training company in the UK.
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