Inside Information

Small employers with up to 50 employees were the focus of the Carter Review - making up over one million companies in the Government's spotlight. It seems that everyone, including Carter and the Government, acknowledges that payroll is too complex for small companies.

Payroll Policy
The Carter Review recommended many practical improvements for the Inland Revenue to make in order to support and assist companies understand their compliance responsibilities. Yet, the solution apparently is to add even more statutory compliance, in the form of compulsory electronic filing of year-end returns.

The payroll industry, in general, disagrees with the reasoning behind the electronic strategy of the Carter Review. While applauding better support provisions and the greater use of technology, the general view is that the real problem is with the complexity of the legislation itself and the level of bureaucracy that it demands. It is Government policy that needs to change, not the introduction of more compulsion.

Winners and losers
It doesn't take a lot of imagination to see that the Government's enthusiasm for compulsory electronic filing stems from the boost it will give to achieving its electronic business strategy and from the greater accuracy and cost-savings that the Revenue will enjoy. These are proper objectives in themselves, but do nothing to address the real compliance problems faced by small employers.

Unless there is major change in Government policy, the losers in this conflict will be the very small employers. To quote one contributor to this article: "Why should Fred in his Shed be subjected to a regime that does nothing for him other than increase his costs? The main problem is that payroll is becoming so complex that Fred does not, and really should not, be expected to understand it. But, if he gets it wrong, he pays the penalty."

It is not surprising that payroll system suppliers support the move towards electronic exchange of forms between employers and the Revenue, as it gives them new business opportunities and increases competition, after all. The process of enhancing systems to handle electronic exchange is being driven by the Revenue's accreditation scheme and ever-higher Standards.

Intermediaries
Much is also being done to make payroll systems aimed at very small companies easy to use, but employers still need to understand their statutory requirements. In addition, many small companies do not have computers, or are not interested in setting up a payroll system, or do not have the time even to think about it. Does the solution, therefore, lie with accountants, bookkeepers and payroll bureaux that offer to take away the problem altogether?

Certainly these intermediaries may be the main beneficiaries of Carter's electronic recommendations. They can remove from employers almost the entire burden of payroll processing. The Carter Review anticipates that a significant number of companies moving to intermediaries in order to meet the compulsory filing requirement.

Intermediaries cannot, however, take away their clients' compliance responsibilities - and neither do they want to. One of the major bureaux makes this point: "Although we file P14s electronically as part of the existing service through EDI, we do not file the P35MT. We expect customers to confirm their compliance and verification of the data they have provided. We would not want to take on responsibility from the employer for the P35."

Small business needs
Whatever the options available to small employers in future there is nothing on offer to reduce the impact of the real problem facing small employers. This is despite the financial incentives planned to encourage busineses to start filing electronically well in advance of the 2009 deadline.

Most larger companies employ specialists to ensure compliance with an increasingly complex body of legislation. Small companies cannot afford that luxury. Only changes in Government policy can really help them.

Payroll options available to small employers
The table of payroll suppliers featured below allocates each organisation to a particular category. Six of these categories show the key options that are available to small employers with up to 50 employees for meeting their payroll obligations. All six options require employers to have a thorough understanding of payroll legislation. The seventh category identifies suppliers of payroll systems that are used by accountants and bureaux to provide services to their own clients.

Category 1: Manual, paper-based, payroll systems
The main supplier of manual payroll systems is the Inland Revenue. Form P11, the Deductions Working Sheet, is used in conjunction with tax and NI tables to record the employer's and each employer's deductions throughout the year, ready to transfer the annual totals to the P14. It is not, however, designed to calculate an employee's net pay and, for this reason, there are a number of proprietary alternatives on the market. This is an inexpensive option, prone to human error, but practical where there are few employees.

Category 2: Computerised calculators to replace tax and NI tables
This option still uses paper forms to record the payroll details, but a software program is used on PCs, or on handheld devices like Palm or Psion, to generate the tax and NICs amounts. Calculators are also useful for occasional one-off calculations where the employer uses a computerised payroll system.

Category 3: PC/MAC-based payroll systems aimed at small businesses
These are computerised payroll systems that either have been developed specially for the small company market or are cut-down versions of larger systems. The better systems have extensive help facilities and telephone helpline support. Many have Revenue accreditation or are in the process of attaining it. The employer has to update the system each year, usually using an upgrade disk provided by the developer.

Category 4: Payroll bureau/accountant services aimed at small businesses
Bureaux, bookkeepers and accountants take over part or all of the payroll process from their clients. At one end of the scale, the service may simply involve processing of the pay and printing payslips and reports. At the other extreme, a fully-managed service may be provided. If earnings vary each pay period, the client may supply the pay details on paper, by fax or telephone, or over the Internet.

Category 5: Internet-based bureau services aimed at small businesses
This is a bureau service similar to category 4 but designed specially to take advantage of the ease by which data may be sent to and fro over the Internet. Perhaps due to security concerns, this option is not used extensively.

Category 6: Application service provider, aimed at small businesses
This is alternative to category 3, where the "application", in this case a payroll system, runs on a remote computer that is managed by the "service provider". The employer effectively rents the software and gains access to it over the Internet or a telephone line. One of the main advantages is that the employer does not have to maintain the system. The service provider operates a support desk and may provide some bureau-type services. It has not yet proved to be a popular option for small employers.

Category 7: Larger payroll systems used by bureaux and accountants to provide their own payroll services to small businesses
This is not an option for small employers, but lists payroll developers that produce software capable of handling many individual companies and keeping the employee files for each company secure and separate from each other.