HMRC has started a pilot among volunteer employers for its Real Time Information (RTI) system that will automatically update employee tax records.
HMRC and the government have come under criticism for effectively writing off millions of pounds of owed tax or benefit overpayments, and RTI promises to help tackle the problem.
RTI is seen by the government as a way of making sure employees pay the right tax and/or receive the correct benefits. RTI is supposed to be fully live among all employers in time for the October 2013 introduction of the government's new Universal Credit system, which covers benefits.
HMRC says RTI will make it easier for employers, pension providers and itself to administer PAYE. Under RTI, employers and pension providers will tell HMRC about PAYE payments at the time they are made, as opposed to only at the end of the year.
HMRC expects to have around 250,000 employers reporting RTI from April 2013 and all employers will be using the RTI service by October 2013, said HMRC.
Ten volunteer employers, including HMRC, are now using the RTI system as a trial.
David Gauke, Exchequer secretary, said: “RTI will ensure that the PAYE system meets the needs of the 21st century. It will improve the service to taxpayers by making it easier to ensure that people pay the right tax after a change of job."
Although 94 percent of employees are estimated to be paid via electronic PAYE systems, there are concerns that RTI will not be all encompassing, as at this stage it is not clear where the burgeoning number of the self-employed who aren't on PAYE fit into the reporting system. There are also concerns that small firms who do not use electronic PAYE systems will find it difficult to go on RTI.
In January, the parliamentary Public Accounts Committee said (http://www.computerworlduk.com/news/public-sector/3329565/small-firms-may-be-unable-integrate-with-universal-credit-system-mps-warn/): "HMRC told us that it is currently identifying how best to include the last 6 percent of employees (about 1.5 million people) and the self-employed in the RTI system, but the detail of how this is to be achieved remains to be worked through."
HMRC claims RTI will save employers a total of £300 million a year, mainly through the abolition of the end-of-year PAYE returns process.
Stephen Banyard, HMRC acting director general for personal tax, said: "We have been working in close partnership with stakeholders to ensure that RTI will be introduced progressively, to give time for testing the new systems and processes and allowing them to bed in."
He said a specialist team of RTI experts will be on hand to support employers through the pilot stages. HMRC says around 300 more volunteer employers and pension providers will join the scheme during May and June.
Subject to the initial pilot being successful, up to around 1,300 volunteer employers will be reporting RTI by September 2012.