By Daniel Hunter

A significant legislative change in the UK tax collection process takes becomes effective on April 6th 2013, and according to Duff & Phelps, a leading global financial advisory and investment banking firm, some businesses may not be prepared for this change and could face financial implications as a result.

The HM Revenue & Customs’ (HMRC) Real Time Information (RTI) system becomes mandatory for all medium-size businesses in April this year; larger companies (5,000 employees or more) and small companies (less than 50 employees) are expected to adopt the scheme by 5 October 2013.

The principal objective of RTI is to enable HMRC to enhance the flow of tax receipts, creating transparency each month of what tax ought to have been paid. This will immediately highlight any outstanding corporate tax liabilities.

The introduction of RTI follows a 12 month pilot study in which HMRC found the trial to have been a success in creating a flow of insightful information and managing the collection of tax receipts.

“RTI is expected to remove administrative burdens for HMRC, however, there will be a cost to businesses, which will have to invest in RTI-compliant payroll software in order to conform. For those who do not comply, there will be penalties," Stephen Clancy, partner, Duff & Phelps, commented.

RTI will give an immediate insight into those businesses not meeting their PAYE/IN liabilities in full, as RTI ensures that HMRC is automatically notified of all PAYE/NI deductions for an individual each time the payroll software is run. Therefore HMRC will have accurate payroll information in order to take prompt recovery action as soon as any arrears arise.

“RTI reduces the payment flexibility that may have occurred in the past, as HMRC will be alerted the moment a PAYE/NI payment has been missed or underpaid, rather than at the tax year end when annual returns are submitted," Clancy continued.

“Therefore, businesses cannot count on the same level of flexibility in meeting their HMRC liabilities as they may have in the past. Over the years, HMRC has played a critical role in supporting struggling businesses that have been unable to meet their tax liabilities in full. In many cases, the extent of the arrears, which can be very substantial, only becomes evident to HMRC and sometimes to the businesses themselves, at the tax year-end.

“RTI will also enhance transparency for banks and other lenders to SMEs, as they will have access to information which will influence their decision making. Funders are well aware of the potential outcomes of unresolved tax arrears.

“Businesses that are already experiencing financial hardship will require more prudent cash flow management in order to ensure that the drivers of receivables, from creditor payments to credit control, are tightly managed. The impact of changes to PAYE/NI payment terms may create significant cash flow concerns for SMEs that are unprepared."

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