Made to Measure

The message is getting across! Payroll is too complicated and the Government is particularly worried about how small businesses are coping with the cost of compliance.
Government Action

Patrick Carter, a businessman and a member of the Government's Public Services Productivity Panel, is reviewing the payroll services market for small enterprises. His objective is to find ways of reducing the total cost to business and to the economy of compliance with the increasingly broad range of payroll obligations.

His brief does not, however, extend to suggesting new ways of collecting tax and NICs and paying tax credits. They are here to stay. Rather, he will look at efficiency improvements through better support and use of new technology, and at the impact so far of Government initiatives such as the Business Support Teams operating from tax offices and the Small Business Service.

The local Business Support Team's services are free and include one-to-one consultations and a choice of 10 half-day training courses for new and small employers on all matters relating to payroll. The Small Business Service is a Government agency set up to represent the interests of small businesses by working with all Government departments to avoid "unnecessary regulatory burdens". The agency's website is www.businesslink.org and its Helpline in 08456 009006.

Reducign the red tape

Some real help with the burden of payroll-related regulation is overdue, and not just for small businesses. The 2001 Budget document with the exciting title "Simplifying the Tax System" contained no help in reducing PAYE and NI compliance. A year after the closing date for submissions on its Discussion Paper "Simplifying National Insurance Contributions for Employers", the Revenue has just published an analysis of the responses. Most of the suggestions relate to compliance audits and there are a few practical changes planned, including a relaxation in the rules for calculating NICs on non-business expenses in the correct earnings period and a common definition of "pay" for PAYE and NICs purposes.

Systems help

Two years ago, the Revenue was proposing vouchers to help reduce the costs of setting up a new payroll system. That idea was scrapped and replaced by an accreditation scheme for payroll software and a set of precisely defined payroll standards. Despite an initial claim that accreditation was intended to benefit new and small employers, it soon became clear that the Revenue's real objective was to make electronic data exchange a feature of all payroll systems. Somehow, the impetus for this still hasn't got going and, nearly a year after the scheme was introduced, only five systems have gained accreditation and one of those isn't yet on the market. However, there are lots more in the pipeline, we are assured. See www.inlandrevenue.gov.uk/ebu/acclist.htm for the current approved list.

Until sending and receiving forms and returns to and from the Revenue has become a standard feature of all payroll systems, the Revenue has made its own submission facilities available. Having registered with the Government Gateway ( www.gateway.gov.uk ) and activated the service with the PIN provided, employers can complete and submit payroll year-end returns and other forms on-line, at www.inlandrevenue.gov.uk/efiling/paye/paye_software_forms.htm . Although aimed at small and medium-size businesses, these facilities are only likely to suit companies who already make good use of the Internet. Most employers will still find it quicker and easier to complete paper forms and send them by post.

The same is true of making monthly and quarterly payments to the Collector. The Revenue wants employers to make their payments electronically, using BACS or PC/Telephone banking, or by debit card with the Girobank's new Billpay service (at http://www.billpayment.co.uk ). However, none of these methods have the same cash flow advantage as payments by cheque and, unless the Revenue makes a radical concession, such as the extra week allowed by Customs & Excise for electronic VAT payments, paying the Collector electronically is not going to take off.

Incentive discounts of up to £100 were offered to employers at the end of the last tax year if they submitted their year-end returns electronically and made at least one payment electronically. Only 1,400 employers took up the offer. Will the discounts be on offer at the end of this tax year or will the Revenue provide some serious incentives?

Real Concerns

Whether or not Patrick Carter can come up with suggestions that will ease the burden of payroll compliance remains to be seen. Any simplification of the existing statutory obligations will be welcome. But, there will be no real relief while it is the Government's policy to increase the free tax collection and benefit payment roles performed by employers through the payroll process; or while the Treasury insists on announcing annual changes to PAYE income tax just a few days before they are to come into effect.

In the meantime, it is no wonder that many small employers prefer to give the payroll job completely to their accountant, bookkeeper or local payroll bureau. Alexandra Durrant, an accountant with a local practice in Surrey, thinks that this is a sensible approach. "Payroll is too complicated", she explains, "and if the accountant offers to do the job, a small company is likely to jump at the opportunity. Many small limited companies, perhaps just a husband and wife, have no knowledge of payroll and just want to pay themselves a salary. We already handle their accounts, so handling the payroll for them is a 'value added' service that is usually simply included in our fees." She describes her service as a "one-stop shop", handling all aspects of business and personal taxation for her clients.

Most of Durrant's clients have no more than 20 employees. When a company has a number of employees, she charges for the extra work involved in handling forms and year-end returns, but keeps the service as flexible as possible by responding to each client's needs. "Our particular strength," she suggests, "is that we don't just accept the pay data or instructions that our clients give us. Because we already handle the client's accounts and are familiar with their circumstances, we recognise anything that looks wrong and query it before it is too late."

Data Checking

The problem area for all accountants and bureaux offering a comprehensive payroll service is getting all of the information needed for completing returns. This is a reminder that employers cannot simply pass on their compliance liabilities. Brian Stenhouse, payroll manager of the bureau service offered by Armstrong Watson, a firm of accountants with offices in the north of England and southern Scotland, makes this point. "Our main problem is getting information from clients generally", he says, "especially if they are unaware of anything to do with payroll and do not appreciate what is needed." Because of this, he finds he has to spend a lot more time with small businesses than with larger companies.

Armstrong Watson's payroll bureau service is a separate operation to the accounting practice and looks after around 1000 clients, with numbers of employees ranging from just one to over a thousand. "Many of the company's clients come to us for their payroll service", Stenhouse explains, "but we also run payrolls for non-clients. However, the benefit from doing both is that detailed information is available internally within the company. Because we know the client and understand what they do, the clerks often pick up potential errors and we are able to design our service around the client's needs."

After an extensive search, Armstrong Watson's payroll bureau has recently implemented a new payroll system. Stenhouse describes it as "payroll-oriented rather than IT-oriented, and therefore requires minimal staff training". The supplier of the system has been successful in selling it to accountants and bureaux and suggests the following features as being important:

• no limit on the number of companies that may be handled
• no limit on the number of employees within each company
• multi-company processing, reporting and BACS submissions
• functionality capable of meetings the varied needs of hundreds of companies
• user control over all system parameters

As payroll compliance increases in complexity, using a local accountant or local bureau is a sensible option for small employers, but not necessarily the cheapest option. The website for one firm of accountants quotes £35 per month for 5 to 10 employees, plus a set-up fee of £55, with charges around four times higher for weekly payrolls. The payroll service is likely to be flexible and, if the accountant already handles the company's affairs, personal. But, there is no escape from statutory liabilities, even if someone else does the job.