United Kingdom - UK provides guidance on correcting payroll errors for earlier tax years

The UK’s HM Revenue & Customs (HMRC) on 22 August reminded UK employers that the way to correct payroll mistakes for earlier tax years has changed in recent years.  

With effect from the 2020/21 tax year, an amendment Full Payment Submission (FPS) is the only option, and typically we refer to this as a “month 13 FPS.” 

The 2019/20 tax year is a transition year, with employers able to opt for an amendment FPS or, alternatively, use the previous method of an Earlier Year Update (EYU) report, depending on the capabilities of their payroll software.

An EYU is the only solution if a correction needs to be processed for the 2017/18 and 2018/19 tax years. While an EYU could be used for earlier years for which an employer was reporting in real time, it would be unusual to go back more than six years before the current tax year to make a correction.    

There are a couple of key differences between the two solutions.  

First, the amended FPS route requires a UK employer to simply report the amended end-of-year totals. For example, if the tax deducted was understated on the original FPS and a figure of, say, GBP 24,000 was reported, instead of the actual amount deducted of GBP 26,000, the month 13 FPS should be used to report the revised tax figure of GBP 26,000. 

This contrasts with the EYU report, which requires an employer to report the difference between the correct end-of-year totals and the figures already reported. So, in this example, the EYU return would report GBP 2,000 to arrive at the correct total of tax deducted for the year.

The second big difference between the two approaches is that the amendment FPS needs to be processed using the payroll software that was used to file the original month 12 FPS. 

Conversely, the EYU report can be processed as a separate stand-alone report via HMRC’s Basic Tools Software by an employer or its third-party advisor, and alongside an employer’s existing payroll software regardless of whether the payroll is in house, managed, or fully outsourced. This is particularly useful if you have changed payroll suppliers in the intervening years and the original payroll provider is unable, or unwilling, to process an EYU.

Additional guidance applies when the correction relates to National Insurance contributions and a refund is due to the employee.

Karen Foster
BDO in United Kingdom