Ian Liddell-Grainger MP : The Big Prize of PAYE

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Ian Liddell-Grainger MP and Jamie Black (Head of Research, All-Party Parliamentary Taxation Group) make the case for reforming the PAYE tax system.

The All-Party Parliamentary Taxation Group (APPTG) today published a report entitled 'PAYE at the Crossroads' that lays out our vision for a new model of PAYE fit for the 21st Century, which would have significant benefits for government policy delivery, businesses and citizens alike.

The APPTG first introduced this model into the public arena in March 2010 and it was formally proposed by HMRC in July 2010. They called it Centralised Deductions. Under Centralised Deductions, employers would pay their employees in gross and the tax calculation would be performed a centralised calculator within the payments infrastructure. The employee would receive their net wage directly into their bank account and the deducted tax would at some point be transferred automatically into HMRC’s bank account.

This model would make PAYE near 100% accurate and save businesses up to £500m annually through cutting red tape. Moreover, Centralised Deductions would allow for the automatic reconciliation of benefits with tax. This means that rather than the citizen paying the state and then the state paying back citizen, benefits would be automatically deduced from tax contributions in the payments infrastructure.

Automatic reconciliation and the flow of real-time income data would transform government policy delivery. In our report we detail a number of policy areas across government departments that our model would make more efficient and effective, from DWP to the ONS. It is particularly useful for means testing, which would be near 100% accurate, and would allow for vast amounts of bureaucracy across Whitehall to disappear overnight.

Centralised Deductions would also revolutionise the way that citizens interact with the state. Citizens would be able to login to a self-service account and see their contribution in tax to the state in real time. Moreover, the government could enhance this feature to provide a breakdown of tax contributions to each department or even policy area. Citizens would be able to login and see their personal contribution to the European Union or how much they pay towards servicing the national debt.

HMRC are currently implementing the first half of Centralised Deductions – ‘real time information’ reporting. This will be used to support Universal Credit through providing real time earnings information. However, there is no commitment to move towards the system we have described above and reap the benefits.

One may think this sounds like a crazy idea, but HMRC have been developed the idea of Centralised Deductions between 2005 and 2010. They have even been a proof of concept – i.e. a working model. At present, there is no commitment by the Government to move forward on this model, as they were put off the mixed reaction that it received in July 2010. The PAYE system was introduced in 1944 and we have grown unhealthily attached to it.

Every government department can benefit from reforming the PAYE system, which is why the most important recommendation in our report is for the establishment of a working group, endorsed by HMRC, within Cabinet Office to look at the benefits of PAYE across government.