The National Audit Office (NAO) has found that the delivery of HM Revenue & Custom's real-time information (RTI) project for a modernised PAYE system is over-budget, not fully resilient, has not yet qualified for financial accreditation and may miss its roll-out targets.
The RTI system will automatically update employee tax records, to ensure that workers pay the right tax and/or receive the correct benefits. RTI is expected to go fully live for all employers in time for the October 2013 introduction of the government's new Universal Credit System, which covers benefits.
Retrieving data more regularly could bring many benefits for HMRC, including greater efficiency through the automation of tasks, more accurate tax credit renewals and improvements in cash flow and debt management.
However, the NAO's report into HMRC's 2012-2013 accounts found that the cost of implementing RTI is at £356.6 million - some £115.5 million over budget - because of new development costs required to increase the system's functionality. Also, within the expected cost, HMRC has not budgeted for any extra costs stemming from any new issues that may arise.
The report also states that although the timetable for implementing and rolling out RTI nationally - April and October 2013 respectively - has been driven by the DWP's plans to progressively extend Universal Credit from October 2013, the NAO considers its targets "challenging".
HMRC ran an RTI pilot during the 2012-2013, which included over 66,000 employer and pension schemes - although this was significantly lower than the 250,000 schemes that it anticipated. The pilot covered the initial matching of employer records with those held by HMRC and the electronic submissions of payroll information.
However, during this period only starter and leaver data has been transferred into the new modernised PAYE system. Testing of the internal data interfaces between RTI and the PAYE system, enabling the performance of end-of-year reconciliations, only started from April 2013, after the live roll-out of RTI.
Further IT releases are scheduled for October 2013 and April 2014, which means that any new issues that arise will be during the time employers start to use RTI for the first time.
One of the most significant issues that arose during the pilot was the creation of duplicate employment records when employer payroll references differ from HMRC records, which could lead to incorrect tax codes being issued to employees.
The report states that "HMRC have developed methods to identify and correct such cases, and are working to address all cases from the pilot period". By the middle of May, HMRC had identified approximately 10,000 duplicates from 21 million employments, but this issue will continue as employers migrate on to RTI.
Furthermore, RTI went live without full financial accreditation, which is a requirement to show that systems introduced are acceptable for accounting and financial control purposes, because of issues that were identified during the pilot.
These issues do not impact an employer's ability to submit data to HMRC using RTI but do result in weaknesses in HMRC's ability to produce and report financial information about PAYE. It is hoped that any problems are ironed out prior to October 2013 when the roll-out commences and financial accreditation is granted.
Also, surprisingly, the report outlines how HMRC has chosen to not develop RTI with full resiliency because of the cost implications and because the PAYE service could be operated in an emergency without RTI. HMRC claims that the RTI service "could be recovered if there is a significant processing disruption".
However, the NAO states that although data submissions can be held temporarily in queue, this would not be sufficient to provide continuity of service in the event of a catastrophic failure. Also, a failure in the RTI service at a critical processing time could also increase the amount of customer communication with HMRC and lead to more effort on behalf of employers.
A phased approach is now being adopted to get the remaining 1.9 million employer schemes into RTI by the October 2013 deadline.