Views and recommendations from the Chartered Institute of Taxation for the Review of Payroll Services by Patrick Carter, sent on 28 August 2001. In response to your letter of 29 June 2001 and our subsequent telephone conversation with Andrew Fraser, we set out below a bullet point response detailing areas which we believe need addressing in the Review.
Whilst we recognize that the review can only take place within the “existing policies for the structure of the tax system” we urge the Government to ensure that all new policies consider such issues as efficiency, and burdens for unpaid tax collectors such as employers. Policies which are complex and inefficient will simply not achieve their aim. Burdens only serve to stifle enterprise.
We also note, with some dismay, the short timescale for this review and the fact that it covers the main holiday period. (We have referred to the difficulties inherent in consultation over the holiday period in our recent report “The Good, the Bad and the Complex – a Survey of Tax Consultations”.) We hope that the review will nevertheless have time to consider all aspects thoroughly, both in the short and the long term, and that it will not be afraid to be radical and enterprising in its recommendations and search for solutions.
We suggest that, in order to appreciate the mountain of paperwork that new employers have to face when taking on their first employee (despite the fact that it can be “packed into a small envelope” via a compact disc as described in the latest employer’s bulletin!), members of the review team should contact the Revenue incognito as a potential payroll client. The need to simplify procedures will then become apparent. We believe there is much circumstantial evidence that small businesses shy away from expansion and taking on employees merely because of this ‘mountain’ of regulation and paperwork. There is little hope in these circumstances that we will meet the ‘Enterprise and Productivity Challenge’ of the post-election mini budget. We hope that this review will enable some real changes to be made and some of the burden removed.
We arrange our bullet points (we were asked to be brief) under the headings suggested in our telephone conversation:
- Rationalising the layers of burden.
The PAYE system was designed as an efficient means of tax collection by employers from employees. Since 1944 it has worked well for the most part, but now it is trying to operate alongside other means of ‘tax’ collection such as student loans and tax credits. We now effectively have three PAYE-type systems. To rationalize these, we recommend that either the PAYE system has to be re-thought or some means of incorporating tax credits and student loan repayments into coding notices has to be devised. At present the problem is not that big (although it is bad enough!) but when the 2 million students are passing through the tax system and New Tax Credits are claimed by the majority of families in the UK in 2003 (to say nothing of the effect of Pensioners’ Credit) the burden of a tripartite system will be impossible and highly inefficient. We appreciate that technology can help here but we believe that if the principle and savings of Pay As You Earn are to be preserved it should be in one system not three. We urge a radical re-think of how PAYE can work under current policy initiatives.
- An employer facing the prospect of administering Statutory Sick Pay for the first time encounters a system which is explained in the Revenue’s own guide in a full 75 pages. We believe that something should be done to simplify this code, particularly as we note that this was one of the recommendations (6.3.12) of the Bath Report (“The Tax Compliance Costs for Employers of PAYE and National Insurance in 1995/96”, Centre for Fiscal Studies, University of Bath, published November 1998).
- We have long advocated the aligning of income for tax and National Insurance purposes. (We submitted a paper in December 1998 on Tax/NICs Harmonisation, and emphasized the point again in our response to the Revenue technical discussion paper on Simplifying National Insurance Contributions for Employers, submitted 29 August 2000.) More progress in this area would be welcome.
- We welcome the recent initiatives to simplify Maternity Pay and Maternity, Paternity and Adoption Leave. One issue which arises is that the reviews are undertaken by departments (in this case the DTI) that are not aware of the other systems which employers have to operate. There is therefore no obvious aligning of time limits, periods of assessment, link with PAYE etc. We suggest that all issues affecting employers should be coordinated by one Government Department. Such a department could minimise burdens by ensuring that definitions align, schemes fit alongside each other and all work within a standard employer’s payroll. If practical it could also coordinate other areas such as redundancy, pensions, insurance, health and safety, minimum wage etc.
- We give a very warm welcome to the proposal to simplify the defined benefit pension scheme, but note that the problem is not just the complexity of that scheme but the fact that employers face interaction with retirement annuities, personal pensions and stakeholder pensions, as well as other types of occupational schemes. They all operate in a slightly different manner. Some rationalization is called for.
- New employers taking on their first employee face a daunting myriad of rules and regulations (not just in the area of taxation). Could some relief be given by allowing a flat rate payment on account by standing order per employee? This could temporarily cover tax, NI, tax credits and student loan repayments for a fixed period of time (say the tax year) with the detail being settled at the year end on an annual basis in a similar way to the VAT annual accounting scheme. Whilst the Institute is not certain that schemes designed just to relieve the burden for small businesses are the best way forward, such a scheme would remove the immediate stress for the new employer and could result in the correct payments of tax etc by both employer and employee on a cumulative basis by the year end.
- Undoubtedly many small new businesses will use new technology for other business transactions and will therefore be able to incorporate e-business for tax. The problem seems to be for older small businesses or businesses which do not need technology to succeed in their business niche. Whilst appreciating the many benefits that new technology can bring, the Institute does not think it should become essential for payroll services. Thus paper-based systems should be retained, possibly with the inclusion of simplified flat-rate schemes and year-end adjustments which could easily be administered on a paper basis.
While support services are useful they do not go to the root of the problem – no matter how supportive the Government is, the only real solution is reform of the complex systems. We have therefore concentrated on this in our response.
- Having said this, more could be done to advertise the existence of the current Government support services.
- There is some argument for saying that the Government support should be directed more at the agent acting for the employer rather than to employers themselves. Employers may turn to their accountant or tax adviser for help first and interposing a Government agency may not be seen as efficient. Of course the agencies would still have to help unrepresented taxpayers.
Finally, and in conclusion, it is transparently obvious that complexity in the personal tax system has lead to complexity in payroll burdens. Subject to our one suggestion of a flat rate deduction for smaller businesses, we believe that the real reductions in burdens will only come about with radical overhaul of the personal tax system. The interaction of minimum wage, tax, national insurance, tax credits, student loan repayments with low personal allowances and potentially five different rates of income tax produces a system which is fraught with inefficiencies. We urge all those working on reviews of this kind to pull together for a simpler tax code, an increase in the personal allowance and a reduction in the red tape burden generally.
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