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Commercial Angles' Newsletter - December 2001

Payroll Review - The Carter Report

Following extensive criticism of the extra burdens put on employers as a result of changes affecting payroll, the Chancellor of the Exchequer commissioned a report. The Carter Report - Review of Payroll Services makes a number of recommendations which will have a big impact on businesses if they are adopted by the government. The principal recommendation is that companies should be compelled to submit payroll end of year returns electronically.

In the Foreword to the report Mr. Carter says "We were asked to find ways to help small employers grappling with their payroll obligations." and "It is sometimes difficult to distinguish between the real costs to business and the perceived burden. For example, people told us that administering tax credits was a real problem but in fact only about 1 in 8 of small employers have to deal with this issue. However, there is no doubt that the weight of payroll obligations falls disproportionately on small businesses, a part of the economy which employs 25 per cent of the UK workforce and contributes about 30 per cent of GDP."

He continues "We have no doubt that the way forward is for employers to take advantage of the opportunities provided by IT. Large employers should be doing this as a matter of course and it should be made mandatory for them to transact with the Inland Revenue electronically. For smaller employers the review concludes that both an incentive and a sanction would be necessary to persuade them to make the switch from paper either directly or through the use of intermediaries. Of course, electronic business cannot be the whole answer: people will always want to get practical help through intermediaries, or by dealing with the Inland Revenue directly over the phone or face to face; we have suggested improvements in these areas."

The key proposals are that:

Employers with more than 50 employees should be required to file their annual payroll returns electronically, either by Electronic Data Interchange (EDI) or by internet, from 2004. The current method of filing by magnetic media should be discontinued as it is too prone to errors.
Smaller employers should be required to file their annual payroll returns electronically by 2007.
Incentives should be payable to small employers who file electronically as follows:

Year 1 2 3 4 5

Incentive payment per employer £ 250 250 150 100 75

The cost of these incentives is estimated at £290 million over five years, which assumes a fairly slow build up of companies filing electronically. If all small employers joined up on day one the cost would be over £800 million.
The Inland Revenue should introduce a NINo verification service.
Other forms e.g. P45 and P46 should be filed electronically.
The Inland Revenue should work more closely with payroll software developers to incorporate more verification of payroll data into their software.
The Inland Revenue's helplines should be radically improved and their Business Support Teams increased so that they may double or treble their employer visits to 150,000 - 250,000 per year. This sounds a dramatic increase but on average employers would only have one visit every six or seven years.
Inland Revenue compliance visits should concentrate more on major problems rather than narrower issues and possibly reduce their implied task of collecting prior year underpayments.
Better guidance should be issued on complicated payroll areas such as SSP, SMP, Working Family Tax Credits or their successors.
In all there are 33 recommendations.

The report points out that the cost of running a payroll is about £288 per employee for employers of 1 - 4 employees and about £5 per employee for employers of over 5000 employees. The huge difference in costs is attributed to IT investments by larger employers and economies of scale. Whether the statistics are accurate for larger employers is questionable. They imply one or two people handling a payroll of 5000. He/she/they would probably not perform some of the other tasks traditionally associated with payroll and which would be part of the cost for small employers.

Other statistics in the report are that "There are approximately 23 million employees in the UK of which nearly 7 million are paid weekly and 16 million are paid monthly. There are approximately 1.5 million employers in the UK about 1 million of which have between 1 and 4 employees and almost 1.45 million have less than 50."

The report mentions that payroll bureaux would typically charge £200 - £250 per year to run a payroll for four employees - this is probably based on inner-London rates. One of the key implications of the report is that, to improve payroll quality with the associated reduction in errors in PAYE and National Insurance Contributions, small employers should be encouraged to use payroll bureaux. In fact the report recommends that the incentives it recommends for small employers should be payable to the payroll bureaux instead, if they bring small employers into the system.

Comments on the Carter Report must be received by 31 January 2002 if they are to be considered.

Articles from previous newsletters