Carter review of payroll services
After three months of research, Patrick Carter's review of payroll services for small employers was published at the end of November 2001, to coincide with the Chancellor's pre-budget report. (See Issue 214) The report and its recommendations were broadly welcomed by the Government. Ian Congreave takes a close look at the Review and suggests that some of its reasoning is flawed and that a number of its major recommendations are questionable.
The Carter "Review of Payroll Services" was not the first report to have been commissioned by the Government into the effect on employers of payroll obligations. A comprehensive report, Tax Compliance Costs for Employers of PAYE and National Insurance, was produced by the University of Bath in 1998 and found, among other things, that
• compliance costs per employee, were £288 p.a. for the smallest of employers but only just over £5 p.a. for those with over 5000
employees
• the cheapest method of providing the payroll service is a manual payroll for the smallest employers, PCs for medium-sized
employers, and mainframe or bureaux for the largest
• the use of accountants for routine payroll work is the most expensive option for small employers and, for this reason, small employers
were encouraged to review their use of accountants for routine payroll work
• payroll bureaux are not normally interested in payrolls with less than about 50 employees.
The Carter Review appears to have been prompted by a number of developments since the University of Bath Report in 1988:
• the introduction of Business Support Teams (BSTs) in tax offices, to assist new and small businesses with their payroll problems
• the development of a payroll software accreditation scheme, to raise standards and put pressure on developers to introduce
electronic exchange of statutory returns and forms
• the requirement on employers to pay tax credits and make student loan deductions.
The Review team was asked to examine
1) the services available to and used by small enterprises to meet their obligations for running payroll, how these are evolving to reflect
new technology, what more might be done to drive the quality, reduce the cost and increase the accessibility of the services available,
particularly to very small firms.
2) the relationship between firms' internal information needs and the costs of complying with their obligations as employers, the
barriers to small firms using the most efficient means of performing the payroll task, the impact of existing government intervention
such as Business Support Teams and the help provided through the Small Business Service, and what more might be done to help
firms meet their obligations more efficiently within existing policies for the structure of the tax system.
Although the review was intended to look at problems facing employers with up to 10 employees, it concluded that the same problems affect employers with up to 50 employees, and it is in the context of such employers that the findings of the Review must be considered. Employers with up to 50 employees make up some 97% of all UK employers, according to the latest figures published by the Small Business Service.
Some of the key findings of the Review were that
• the competitiveness of small employers is being affected by increasing payroll obligations
• the complexity of PAYE, NICs and other obligations including SSP, SMP, WFTC and Student Loans affect small employers
disproportionately, due to the cost of payroll software and third party payroll expertise
• the complexity of the system leads to confusion, uncertainty and errors
• many small employers operate a manual payroll because they do not use computers for their core business.
Some of the solutions proposed by contributors to the Review were to:
• strengthen the customer support strategy covering helplines, guidance, the Inland Revenue website and BSTs
• introduce cross-departmental teams to support businesses covering all aspects of running a business
• supply small employers with free Revenue-approved software packages covering all payroll tasks
• simplify the rules for PAYE and NICs.
Despite calls by some contributors for radical changes to the payroll tax rules, the Review made the following recommendations within the Government's current policy objectives, as required by its terms of reference:
• Revenue dispensations should be easier to obtain and keep up to date
• The DWP should seek ways of simplifying the rules for SSP
• The Revenue website should include an interactive company car 'ready-reckoner'
• Where employees receive only one relatively small taxable benefit over a number of years, the Revenue should consider requiring
information about the benefit every five years
• More items that most people would expect to be tax free should be exempted
• The Revenue should seek ways of simplifying the complex rules for taxing vans with shared use.
Many of the Review's key recommendations follow appropriately from its findings, particularly in the area of better support and assistance. Among these recommendations are:
• giving the Revenue's website a more friendly "feel"
• raising awareness of the Employers' Helpline, and ensuring the consistency of answers to queries given by Helplines and tax offices
• extending the role and remit of the BSTs to cover all employers and the selection and use of payroll systems
• changing the tenor of compliance visits, to avoid nit-picking and concentrate on major problems and procedural support
• raising awareness of dispensations, and limiting the need to renegotiate them each year when expenses increase in line with
inflation
• simplifying the guidance on SSP and SMP
• introducing usability testing for Revenue manuals.
Although these support and assistance recommendations are sensible and welcome, some of the Review's recommendations in the area of technology are controversial. The headline recommendations are that
• electronic filing should be compulsory by 2004 for all employers with 50 or more employees, and compulsory for all employers,
possibly by 2007
• employers should be given financial incentives to move to electronic filing over five years, starting at £250 in the first year, and falling to
£75, with no option to revert to paper filing
• if employers move their payrolls to intermediaries, i.e. accountants and bureaux, those intermediaries should receive the incentives
instead
• an accreditation scheme should be introduced for intermediaries.
The Revenue's target is to make all of its services available electronically by 2005. The payroll software accreditation scheme currently only requires P14 and P35 filing to be provided (although it is recommended that P45s and P46s should be added), but the Revenue's own filing by internet initiative is much more advanced. (See elsewhere in this issue) The Review's recommendations are radical in that they propose to compel employers to use these services. They are also questionable in that they are intended to help resolve employer's problems with the complexity of payroll. The link between compliance with complex legislation and compulsory electronic filing is not argued in the Review and it is hard to imagine how it will help.
The Review also recommends that employers without IT facilities should give their payrolls to accountants and bureaux to handle, despite the findings of the University of Bath report mentioned above. For filing on behalf of their clients, these intermediaries would receive the £250 incentive in the first two years. An incentive of £250 may be sensible to cover an individual employer's filing costs, but the same incentive for intermediaries who file their clients' returns in bulk is not reasonable. Intermediaries have, without doubt, an important role to play in the payroll market and the Review argues at length for intermediaries to receive the incentives, not just so that their services can be priced more competitively, but also to market their services more widely. The incentives would, therefore, be paid for filing returns but, in practice, would be used to subsidise their payroll services.
On the other hand, there are no findings in the Review about the role that some payroll software developers are playing in this market, particularly in producing easy-to-use systems for the smallest employers. The only recommendation, made in response to the suggestion that the Revenue should supply free accredited software, was that the Revenue should work even more closely with software providers, to increase the usability and functionality of their systems. In concentrating principally on the needs of employers without IT capability and heavily promoting a solution that involves the use of intermediaries and subsidising their services, the Review is one-sided and its recommendations in this area are therefore questionable.
One of the quoted benefits from using the payroll services of intermediaries is that there is "less need to learn about changes in tax rules and government policies". This is clearly wrong. Employers' compliance obligations are in no way reduced because they give their payroll processing and filing to an intermediary to handle on their behalf. It may reduce their workload but it does not reduce the need for them to be fully aware of their legal liabilities. If employers make errors or fail to provide critical information because they are not aware of their legal obligations, it is the employers who are subject to any resulting penalties and interest charges, not the intermediary.
In summary, the findings of the Carter Review are to be expected and many of the recommendations are sensible and to be welcomed. The complex nature of the payroll-related legislation within which employers must operate is confirmed, but some of the recommendations cannot be substantiated by the findings. In particular, the real motivation for the proposal that payroll complexities are best managed by compulsory electronic filing appears to be the Government's desire to "increase the number of employers making use of the new technology". And the main beneficiaries of the Review, if its recommendations are accepted, will be the accountants and bureaux receiving incentives for filing their client's returns that turn out to be subsidies for operating and marketing their services.
Copies of the Carter Review may be ordered from Hasan Mustafa, at hasan.mustafa@ir.gsi.gov.uk , or downloaded from www.inlandrevenue.gov.uk/pbr2001/index.htm Responses are requested before the end of January 2002. - Payroll Briefing 216 - 17 January 2002
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For Payroll and Human Resource Professionals
