Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss that schedule 48 be the Forty-eighth schedule to the Bill.

We are now on to issues relating to the way in which HMRC plans to implement what is known as real-time information as part of the changes to the pay-as-you-earn returns procedure. I assume that that is driven by the onset of universal credit among other changes. That is clearly one of the biggest changes to the PAYE system in 70 years, which, in broad terms, obliges all employers to submit online a return to HMRC on or before making any payment to an employee and/or a return in respect of every tax month, and a final return within two weeks of the end of the tax year.

This issue may not hit the headlines frequently, but it is a significant change for many employers, particularly small firms. Quite naturally, there are concerns about the changeover: whether the IT systems are adequate and whether small firms in particular can cope.

On 12 June, HMRC announced that 1.4 million employers are now reporting under RTI. Of course, the Institute of Chartered Accountants pointed out that while that may be an impressive statistic, it means that over half a million employers still have not begun to implement RTI reporting. It expressed concerns that many small employers will face problems with the requirement to report payments to employees on or before the date that they are made. It stated:

“This requirement will in our view impact disproportionately on the smallest employers, adding to their compliance burdens.”

Even with the relaxation to allow reporting within seven days of payments in some limited situations, which was announced back in November, this measure could significantly increase the number of times that employers have to run their payrolls, an arduous process—potentially from 12 times a year to 52 times a year. Equally, that might increase the chance that mistakes will be made, because sometimes mistakes are made in those runs when small firms have a number of employees who have a change in circumstances that does not necessarily fit in line with the tax year.

My questions for the Minister are driven by representations. The Low Incomes Tax Reform Group has expressed concerns about the late-filing penalties that the Minister seeks through the clause. It wonders whether it would be unreasonable to force employers to prioritise the timely submission of returns over their accuracy. There is a trade-off here: timely submission is one thing, but accuracy matters as well because trying to undo a complicated mistake can compound the bureaucracy headache for those companies affected.

My questions are about whether Minister has properly taken into account the enormity of the change. Will he outline how the new penalty regime will work in practice? It is not entirely clear how a monthly penalty for a late submission will be calculated if, for example, there is more than one late submission in the month. If there are a different number of employees for each submission,  which late submission will the penalty be based on—the first one or an average? Legislation states that the late filing penalty will be calculated in accordance with regulations made, presumably, by HMRC commissioners. Will he make the regulations available for consultation before they are published so that people can at least see how the process will work?

I want briefly to raise a broader point regarding late payment, particularly with regard to PAYE. The Minister will be aware, through correspondence, of Unitruck Ltd, a business based in Shoebury that employs 80 people in my constituency. Historically, when it has paid a few days late it has not been subject to a late payment penalty, but with the change in the rules it found itself with an £11,646 penalty at short notice. The change in how the late payment penalty was going to be applied was placed on the internet but not notified to the client. Late payments and fines for PAYE are a historical issue in this sector. I am concerned about this as we move forward. I urge the Minister to ask HMRC to be lenient during the transition period. I understand that rules have to be applied. However, I would gently say to him that I was somewhat disappointed that the amount could not be refunded to the company I mentioned, particularly as it was worried about the principle rather than the actual sum and was prepared to donate the money to the Southend Fund, an organisation in my constituency and yours, Mr Amess.

I fear that you may scrutinise my answers to these questions even more carefully than usual, Mr Amess.

Clause 227 and schedule 48 will introduce new penalties for real-time information. Those penalties are designed to encourage employers to comply with the information and payment obligations set out in the PAYE regulations while ensuring those who do not comply do not gain an advantage. Most employers will be expected to report PAYE in real time by October 2013. Employers operating PAYE in real time are required to tell HMRC details of the sums paid and deductions made on or before the date they pay an employee. New late filing penalties are needed, as the existing penalties for PAYE are designed for annual returns and would not be effective for RTI, where employers are required to file more frequently—daily, weekly or monthly. The latter would perhaps be the most common.

Schedule 48 will make changes to inaccuracy, late filing and late payment penalties to cater for RTI. Where there is an inaccuracy on a return, the new legislation will treat the whole tax year, rather than each return, as an assessment period. That means that one penalty notice can be issued to an employer to cover all errors in the year, rather than a separate notice being required for each error on each return. The schedule also includes new late filing penalties for RTI. There will be one late filing penalty each month based on the size of the employer’s PAYE scheme, with penalties being charged each quarter. The model includes one annual unpenalised default, so a penalty is not payable for the first tax month each year in which an employer fails to make a return on time. There will also be a short penalty-free period for new employers. That is designed to give them some time to set up their PAYE scheme and become accustomed to the “on or before” filing  requirement before late filing penalties begin. The schedule also makes some changes to the current late payment penalties so that they can be charged in-year rather than after the end of the tax year.

There is a new provision for a payment tolerance to be set in regulations. That is designed to ensure that late payment penalties will not arise where there is a small difference in the sums paid over by the employer in a tax period compared with the sums shown as due on the returns received for the same period. The changes to the late filing and late payment penalties will take effect from April 2014. That date is designed to strike a balance between underlining the existence of the new information obligation and giving employers time to get used to it.

I was asked whether there is a risk that these penalties may encourage employers to file inaccurate returns rather than risk a late filing penalty. We do not believe so. Returns will be checked for accuracy and error penalties will be applied in appropriate cases, so it is important that employers take reasonable care to get their returns right. The incorrect return penalty is potentially much higher than the late filing penalty—up to 100% of the tax lost—if underlying behaviour is deliberate. The new filing requirement has been designed to fit with employers’ payroll processes, so compliance should be quick and simple for the majority of employers. I would emphasise that point as a whole with regard to RTI. This is essentially about the integration of normal payroll processes with the returning of information relating to tax to HMRC.

I was asked when the secondary legislation will be published for consultation. In accordance with the tax consultation framework, it will be published later this year to give time for comments to be taken into account before the changes are introduced in April 2014. The late filing penalty is based on the latest information regarding the size of the employer.

I do not want to be drawn too much into the individual case raised by my hon. Friend the Member for Rochford and Southend East. As he says, we have corresponded on the matter. He will be aware that HMRC is independent in operational matters, and it is therefore not possible for me, as a Minister, to direct it in such cases. There is a well-established regime in place. This is an attempt to ensure that taxpayers provide information in a timely manner and that penalties are applied fairly. He said that the company he mentioned was not aware of the change in approach. I do not want to go into too much detail now, but I am happy to discuss it with him further.

Schedule 48 makes changes to the existing penalties legislation to cater for real-time information. The new penalties have been developed in conjunction with employers and their representatives and framed in a way which responds to their feedback, and they are an important part of HMRC’s overall compliance package. I therefore commend them to the Committee and hope that the clause and schedule can stand part of the Bill.

Question put and agreed to.

Clause 227 accordingly ordered to stand part of the Bill.

Schedule 48 agreed to.