Research conducted by UHY Hacker Young last year found that HMRC had collected £737m in taxes and penalties following a crackdown on payroll tax errors. ICAEW head of enterprise Clive Lewis says statutory changes often trip small businesses up. “Many businesses were caught out by auto-enrolment. By comparison, RTI – which requires a business to submit information to HMRC in real time when it pays an employee – went relatively smoothly.”
Another regular payroll mistake is paying a member of staff directly rather than reporting it through the payroll, says Bivek Sharma, head of KPMG’s small business accounting practice. “This can have negative ramifications for both the employee and the employer as it ultimately leads to more time spent sorting out tax and National Insurance and can involve financial penalties from HMRC, as well as leaving employees disgruntled.”
Multinational professional services firm TMF Group’s UK managing director Sue Lawrence agrees that when pressed for time, small businesses often make the mistake of paying an advance or bonus then forgetting to record the payment through their payroll system. She also refers to businesses neglecting to run payroll on time.
Another problem is over or underpayment of salary where there is a breakdown in process or communication, such as late notifications of starters, leavers or changes in hours or rate of pay.
“Both in-house and outsourced payroll can present inconveniences,” says Paul Bulpitt, Xero’s UK head of accounting. “In-house payroll is a good option for those with a low number of employees and a basic payroll that does not require sick pay or parental leave. Businesses with this set-up could easily rely on software to handle payroll internally.”
Many firms continue to manage their payroll manually. A survey of UK finance leaders published by integrated travel and expense management solutions provider Concur last November found 7% had a completely manual payroll and only 22% believed their payroll process was fully automated. Fewer than one in five (19%) thought their payroll was as efficient as it could be.
The company’s UK SMB managing director, Dafydd Llewellyn, accepts a paper-based approach to managing finance can work for start-ups and the smallest businesses. “However, as you grow you will find your codes and processes become increasingly complex and using Excel spreadsheets will simply slow the process down.”
Chartered Institute of Payroll Professionals senior policy and research officer Samantha Mann says: “Ignorance is no defence when it comes to non-compliance. While more nudges and prompts are being incorporated into payroll and accounting software, they are not a replacement for basic knowledge. Taking time out to learn the essentials – or maybe buying in external specialist support – is something all small and micro employers should consider.”
How to keep up to date
Any business pondering outsourcing payroll needs to ask if it has the in-house capability to operate this function effectively, says Lewis. “This not only includes preparation but keeping up to date with statutory requirements for PAYE and NIC as well as pension auto-enrolment. It also has to consider whether to use commercial payroll software or HMRC PAYE tools. Talk to a chartered accoun-tant before making this decision.”
Lawrence says: “An external payroll provider will often have systems a small employer would not be able to develop or support. Online payroll portals for employees mean that hard copy wage slips are not required, online queries can be made and generic communications given to all staff simultaneously.”
Employers who have gone down the outsourced route can scale their payroll as business and staff numbers grow. For those who don’t want to take this approach, tools that can automate processes can release employees to carry out more rewarding jobs.
“A human element is always going to be required, but the sheer amount of heavy lifting and analysis that these tools can take on means far fewer people may be needed,” he adds.
But software costs are an issue, according to Mann. “HMRC provides a basic PAYE calculation tool, but it doesn’t aim to replace commercial third party software. Low cost or free third party payroll software is available, but businesses need to factor in the time needed to understand it.”
Simon King, payroll manager at accounting firm Plummer Parsons, acknowledges there may be reasons why an in-house payroll would be preferable to the business owner. “They may already have an in-house human resources or finance team and depending in which department payroll sits, this could lead to an integrated HR/payroll or finance/payroll process that could suit the business better,” he explains.
Why planning is vital
According to Kathy Lloyd from the EY tax team, for a small business to decide which model is fit for purpose, upfront planning is vital to ensuring the correct level of investment is made in terms of both time and money. Tax advice should also be sought in order for the decision maker to understand the complexities of the process.
“They should factor in the external environment, company growth and mid- to longer-term business goals,” she continues. “Taking such an approach would ensure the payroll function develops and grows in line with the business. If the person running payroll is pulled onto other matters vital to the business and errors are creeping into pay runs, outsourcing may be a good option.”
UHY Hacker Young’s research also revealed that SMEs are less likely to seek expensive advice on tax issues. Lewis says the cost of using the services of a chartered accountant needs to be weighed against the advantages of ensuring that the business pays the correct amount of tax on its business profits and that the accounting records are up to date and provide sufficient management information to run the business.
Smaller companies tend to take a reactive approach when dealing with tax issues, as they often have little time to research common issues, suggests Sharma. “Finding a proactive outsourced provider can be a huge help for those businesses who lack the time or capabilities to manage their tax in-house.”
Lloyd notes that even large business seek advice on matters such as National Minimum Wage and Living Wage obligations and compliance, workers’ holiday pay rights and obligations and whether certain workers are contractors or direct employees.
“Non-compliance can create additional uncertainty for cash flow and profitability, disrupting and impacting the core of the small business,” she concludes. “Taking a proactive approach to taxes, planning for the future, understanding accountabilities and investing in the pay and people agenda should lead to the common pitfalls being avoided, reducing the risk of over or underpayment of payroll taxes.”