Weighing up the Options

Details of the government's payroll voucher scheme, aimed at small new companies, have been published in the form of a DTI consultation paper. The scheme will be run by the Small Business Service and is planned to start in April 2000. Although "the burden of running a payroll is one that small firms find particularly onerous" we are told, "relatively few of the smallest employers take advantage of the range of products and services available in the market to assist them with these obligations".

The market for payroll products and services for small companies is vast. According to government statistics for small and medium enterprises (SMEs), of the 1.2 million UK businesses with employees, only 25,000 have between 50 and 249 employees, and just 7,000 have 250 employees or more. How do the 97% of businesses with less than 50 employees currently manage their payroll obligations?

The "Tax Compliance Costs" survey carried out for the Inland Revenue and DSS in 1996 and published in 1998 reveals both the nature and the relative costs of the approaches used by small companies for their payrolls. Of the five methods in use, i.e. manual using tax tables, accountant, desktop PC, mainframe computer and payroll bureau, the most expensive by far is the service provided by accountants. If cost were solely the criterion for deciding which method to use, calculating payroll manually would be the cheapest for up to around 24 employees, PCs would take over from that level and, where employee numbers exceed 500, the use of payroll bureau should be considered. A mainframe computer system is only a cost-effective option at around 5,000 employees, assuming that it is already used for other purposes.

It must be said that the findings of the survey with regard to bureaux appears to ignore the many economical schemes offered by large and small bureaux alike, aimed at very small employers.

The survey concentrated principally on costs, but there are other factors that prompt a preference for one approach over another. Why, for example, do many small companies continue to calculate their payroll manually despite the increasing availability of inexpensive computerised alternatives? Probably two-thirds of employers still use tax tables and paper forms, either the Revenue's P11 or proprietary "write-once" alternatives. Maureen Bott of Kalamazoo Security Print says "In many companies, the PC would only be used for wages once a week or month so those using it regularly would have to stop what they were doing. Many prepare their wages out of hours, often at home, or use a bookkeeper, and prefer a manual system that can be used anywhere".

But isn't the use of tax tables laborious and prone to error? For example, Kevin Misselbrook of Access Accounting suggests that "great care always needs to be taken on reading the complex matrix of tables. It is undoubtedly true that payroll software packages offer levels of accuracy not achievable with manual systems". However, Maureen Bott maintains that "it is not a problem to use the tables, in fact it is no quicker on a computer." The natural reaction may be to dispute that, but there is no doubt that the Revenue's survey clearly shows that calculating wages manually is cheaper than any other method when employee numbers are low.

A more recent development, too recent for inclusion in the compliance costs survey, is the appearance of PC and Psion-based payroll calculators that substitute for the tax tables. Mark Kinnell of Premier Technology believes that "some people in small businesses feel uncomfortable with the discipline of running a payroll system but, with a calculator, it is easy to maintain the paper records with which many are still more comfortable". Peter Prater of QTAC Solutions reckons that calculators don't just minimise the potential for error but "they offer facilities that tax tables cannot help with, for example, the payment of catering and restaurant staff under a 'free of tax and NI' arrangement".

There is a clear reluctance, however, for businesses operating a manual payroll to move to a computerised payroll, despite the increasing familiarity with PCs and their ever-reducing costs. Why is this?

In simple terms, John Rankin of JGR Business Services believes that "there are still many small companies preferring to calculate their payroll manually for various reasons, for example, they do not understand computerised systems, or they fear unseen errors within the magical grey box, or they are just old-fashioned and do not like change."

Further, Tim Barton of Deverill Business Systems thinks that "many employers recognise payroll as an important element of running a business but can't grasp the long-term benefits of investing in a computerised system. They see the expense of maintaining payroll year after year as a waste of money so prefer instead to waste half or whole days here and there ploughing through the free manual system."

The compliance costs survey identified the payroll services offered by accountants as the most expensive option for small employers. Why is this option nevertheless so attractive?

Mark Searles of Sage Group explains that the knowledge and resource is not always available in smaller organisations and, even though it may be more costly to use the accountant, the benefits outweigh the overheads of recruiting and taking the payroll in-house. They also see their accountant as their financial advisor and there is an element of trust in the relationship."

Similarly, Richard King of Apex Software Systems says that "a lot of small businesses like the reassurance of having their payroll run by their accountant, not to mention the convenience. However good or low-cost the in-house payroll system, running a payroll is still a tremendous bind and many business people just want to get on with running their business". Interestingly, Robert Agar-Hutton of Winghigh suggests that "most people assume that accountants both like doing and are good at payrolls. We have found that the truth is that many small accountants hate doing payrolls, and only do them to keep client goodwill".

Similar principles apply to the services offered to small companies by payroll bureaux, although, unlike accountants, payroll is their business. Keith Brown of Central Computer Management says "The use of professional bureaux pays dividends far beyond monetary value and customers do not need to get involved in understanding constantly changing legislation or purchase of hardware or software when such changes take place. The peace of mind alone is invaluable, allowing small businesses to concentrate on their core business."

Finally, what do the suppliers of systems and services to small employers make of the government's proposed payroll voucher scheme? Here are a few of their comments:

• the scheme should be open to any supplier capable of providing a product that meets the requirements, not just the "big" players
• approved systems should include training on the principles of payroll, plus training and support on the payroll software itself
• the scheme will 'make or break' a lot of businesses in the sector
• it will probably end up being scrapped, as much form-filling and question-answering will be required and the average small business will prefer to carry on as they are
• like so many of the government's bright ideas, there is not enough time to implement it in the time-scale they are proposing. If it is rushed through and badly thought out it could all turn out to be a horrible mess with the suppliers paying the price, especially the small ones
• when people make the decision to computerise their payroll operation, they seem less worried about quality standards than they are about price and advertising.