Small but Perfectly Formed

The biggest problem with discussing small payrolls is that no-one is quite sure what 'small' is. There is no fixed definition of 'small payroll manager', any more than there is for 'small employers' who may reclaim Small Employer's Relief on their payments of SMP. What exactly 'small' means in the context of a payroll operation can be anything you choose it to mean.

To one of the large developers of payroll systems, with products aimed at the corporate and multi-national markets, a company with a thousand employees would be considered 'small', and not of a size with whom they could realistically do business.

At the other extreme, there are other payroll systems suppliers for whom 100 employees is large, and 10 is small. In between are the bulk of payroll developers with clients ranging in size from 100 employees up to several thousands. And, before the complaints pour in, there are a number of developers whose clients span the very tiny up to the very large, with a tariff to suit all pockets.

So, what is a 'small' payroll? We can consider a number of different measures:

The criterion for paying the Collector quarterly, instead of monthly, is that the average monthly payments of tax and NICs are less than £600. According to my PC payroll calculator, that could equate to a payroll of two employees earning £1000 per month, or of 15 employees earning £400 per month. According to the latest (sic) Revenue statistics, in 1995 there were 678,174 employers who paid the Collector quarterly. Therefore, a little over 50% of the 1.3 million employers who operate PAYE have only a handful of employees.

The position is clarified by Department of Trade and Industry (DTI) statistics that reveal that there are just over one million employers with fewer than 10 employees, i.e. 83.6% of all businesses with employees.

Another measure is the threshold at which employers can claim Small Employer's Relief on SMP payments, i.e. that bit above the 92% that everyone else can recover. The threshold here is £20,000 of NICs per annum, which works out to £1667 per month. It would require 57 employees earning £400 per month, or 10 earning £1000 a month, to exceed this threshold. So, 'small' in this context could be 50 or so employees. From the DTI figures, 97.4% of all employers have fewer than 50 employees.

Another approach would be to say that a payroll operation is small where it only requires a part-time payroll administrator to look after it. Depending on the complexity of the payroll, there may need to be 100, 200 or even more employees before a full-time resource is required. The DTI statistics show that 99.3% of employers have a workforce below 200 employees. For those readers who are becoming intrigued by these revealing figures, there are 5,000 employers with between 250 and 499 employees, and a further 3,000 with 500 employees or more.

For the purposes of this article, I had intended to take 200 employees as the line between small and medium size businesses. However, how can we possibly say that 99% of all businesses are small? Even if we draw the line at 50, that is still more than 97% of employers. Does this train of thought suggest that size is not, perhaps, the best way to distinguish one payroll operation from another?

This situation raises some intriguing issues. The developers of stand-alone payroll systems, or of integrated personnel and payroll systems, are generally not looking for customers with fewer than 100 employees. If we draw the line at, say, 50 employees, these companies, namely those who advertise in the payroll magazines or who take stands at the exhibitions, are competing in a market consisting of less than 3% of all businesses in the UK, around 32,000 of them.

The same can be said of the payroll magazines themselves. Even though Pay Magazine has the largest circulation of the payroll journals available, and even if we say the payroll journals are read by the same size businesses as the software companies are targeting, they cannot between them be far off reaching saturation within that market. But what about the more than a million businesses who don't read the mainstream payroll journals at all?

There is also a related issue with payroll training. The need for whoever runs the payroll in-house to be fully up-to-date with payroll-related legislation is true irrespective of the size of company. Unless you pass the payroll over completely to an accountant or bureau, you need to know what you are doing whether you have a handful of employees or thousands. Is it just the companies with 50 employees or more who attend the courses?

Not according to Reg Ruffle, partner at Payroll Solutions. "We have had a number of companies with fewer than ten employees on our courses," he says. "Justifying the cost may be a consideration in some cases but they all need to know the current rules and the number of employees is not the issue." So, what is the issue? "The difficulty is in how much we are prepared to spend to reach them," he admits frankly. "We can, for example, do a mail shot to 500 companies with 200 or more employees, and another to 2,500 companies with 10 or more employees. The response to each campaign is likely to be the same, but we have spent five times as much with nothing more to show for it."

Integrated financial systems

So, if the developers of stand-alone payroll and integrated personnel and payroll systems have the top end of the market sewn up between them, who is addressing the remaining 97% of the market? Among the three main categories of players in this vast market are the suppliers of integrated accounting packages, usually where payroll is just one module among many. There are some big names here, but also countless small ones. On my own database, I have 65 different suppliers of payroll systems attached to financial packages, and that is only some of them.

Carole Wilson, Sage's Payroll Product Manager, says that a customer with 100 employees is large in Sage's terms. "The Sage Payroll", she says, "is now used by over 70,000 companies, most of whom have between 25 and 50 employees. For even smaller businesses, we provide our Instant Payroll. It is designed to handle up to 10 employees and is an ideal way to migrate from a manual payroll to a computer solution." Users of this mini-payroll are able to subscribe at special rates to the SageCover helpline and it is Carole Wilson's comments about the use of the helpline that is especially interesting. "Larger companies, say with 50 employees, probably have a bookkeeper or clerk looking after the payroll part-time, and they have some familiarity with legislation. But it is the Instant Payroll users that make the most use of the helpline. They make longer phone calls, mostly with questions about payroll, not about the software. They want to get it right and they tend to be more concerned about being audited by the Revenue."

Accountants

The implication of these comments is that, the smaller the payroll, the greater the need for support in understanding payroll legislation. It is not, therefore, size itself that is the issue, rather the difficulty of someone in the business learning and staying abreast of complex and volatile PAYE and NI legislation, a factor that may also strike a chord in many larger companies. How a company can satisfy this compliance requirement leads us to the second player in the 'small' payroll market, namely the veritable army of accountants and small bureaux who handle payroll on behalf of their clients. In most cases they provide a "fully-managed service" in its truest sense, managing all aspects of payroll on their client's behalf, usually as a part of their overall accountancy service. At this end of the market, total outsourcing is a sensible and viable solution in addressing compliance and resource issues.

I asked Alexandra Durrant, a chartered accountant cum payroll writer and lecturer, about the payroll service she offers to her clients. "These are tiny businesses," she explains, "and specialists in their own field. They have no time to learn PAYE or how to use a computer package and, if they can find someone to pay their employees and meet the legal requirements at a reasonable price, they leave it to them." Confirming Carole Wilson's comments, she feels that it is risky for a very small business to rely on a computerised payroll without considerable support. She tells of one client who entered an NI rate of 1.2% instead of 10.2% when updating the tables at the year-end, and ended up with a £10,000 liability. "It makes people think twice about doing it themselves," she says.

Manual payroll

Despite the potential compliance problems facing companies without a skilled in-house payroll resource, the Inland Revenue and Contributions Agency expect employers to get PAYE and NICs right by following the instructions on the CWG1 cards, finding the correct deductions from the appropriate tables, and recording the deductions manually on their P11 Deductions Working Sheet. The manual payroll is the third way in which many of the more than a million businesses with fewer than 20 employees handle their PAYE obligations.

It is not clear how many employers use the P11 working sheet. It is certainly not a practical document in use and it is designed principally to provide the correct figures for year-end returns. It cannot be used to record net pay and its horizontal format encourages errors in adding and subtracting. For these reasons there is a thriving market in proprietary forms that have a vertical format and provide a more logical step-by-step approach to reaching net pay.

Among the suppliers in the manual payroll market is Kalamazoo Security Print, who currently provide forms and payslips to over 100,000 businesses. Hilary Turner, Kalamazoo's Marketing Executive, says, "We supply forms for the manual calculation of payroll to companies with up to around 25 employees. At that size, they are usually looking to computerise their operation. Some go on longer, though, perhaps because they are scared of change, or they are just not computer literate, and we have some customers with over 100 employees who still do their payroll manually."

Complexity

Whatever the size of the payroll operation, the choice of which method to use, software, accountant or manual, is not so much based on the numbers of employees being paid but on the complexity of the payment structures involved in calculating the pay. If a company happily handles 100 manual pay calculations each period, the employees are probably being paid the same amount each time. Conversely, there may only be a handful of employees, but if there are complex supplements and premiums, the employer will soon invest in a computerised system or give the job to an accountant to do.

Curiously, the developers of the more sophisticated payroll systems will also readily agree that size and complexity are not synonymous. A road haulage business with 50 employees may have to invest a lot of money in a highly functional system because the payroll is so complicated. At the other extreme, a service company could have 500 employees paid monthly with minimal adjustments and be perfectly happy with a cheap and cheerful module of an accounting package.

Why, therefore, is payroll software usually licensed according to the numbers of employees processed? Why do accountants and payroll bureaux usually charge for the number of payslips produced? A 'small' payroll may, in fact, be a 'large' payroll in terms of the functionality demanded and the support provided by the developer. Likewise, a payroll that is 'large' in terms of employee numbers may really be 'small' in the context of the work involved and the range of features utilised. Perhaps size is not so important after all.