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Opinion: Strategic flaws undermine PAYE Online

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Money

Ian Wheelan of eePIC surveys the electronic chaos surrounding the introduction of online filing for PAYE year-end returns and questions whether the rush to e-government is delivering the promised benefits of quicker and cheaper processing.


The Prime Minister, Tony Blair, committed the UK to the laudable aim of becoming a major player in the development of electronic communication between individuals, businesses, organisations and local and national government.

The lack of direction, analysis and control which the Board of the Inland Revenue, or HMRC as it is now known, and very senior civil servants have exercised in providing the IT suppliers EDS and Capgemini with clearly defined business requirements has brought about a very sorry state of affairs which has had serious and alarming impacts on citizens and business organisations.

Focusing on the PAYE aspects of electronic communications, for which there are legislative penalties of up to £3,000 and incentive payments of £250, we discover serious shortcomings with a very expensive system.

Two electronic gateways are available, the Internet and the Electronic Data Interchange system, yet they operate differing validation on exactly the same the PAYE information. This means that the choice of electronic gateway can have a considerable effect on the submitting organisation. Choice is good, but it must be accompanied by information which allows informed decision.

HMRC’s “quicker, cheaper and more efficient” propaganda message did not touch on these important aspects.

As a result, Internet users have a small advantage over EDI users, since “errors” which are being allowed through the Internet Gateway are being rejected at the EDI Gateway. For example the inclusion of an “unacceptable” National Insurance Number – AC123456D – in a submission of 12,000 Forms P14 via EDI would cause the entire submission to be rejected at the EDI gateway. The submission would have to be corrected and resubmitted. The inclusion of the same, or a similar, unacceptable National Insurance Number on an Internet submission would not cause any rejection or resubmission.

The lack of formal definition as to what constitutes an “employer” has lead to the situation where the incentive payments initiative is open to considerable abuse. The original intention was to financially support those employers with less than 50 employees who took up the challenge of electronic PAYE communication.

The lack of attention to this area means that it is possible to engineer an employer so that instead of one organisation with, say 50 employees, there are 50 employers, each with 1 employee.

This means that one moves from £250 Incentive payment for one organisation to a much more financially attractive situation of £12,500 for the same organisation, structured slightly differently. Inland Revenue sources (who do not wish to be named, for obvious reason) have suggested that there could be more than £1m at risk this year, due to this inventive reorganisation, hence the introduction in March 2005 of Statutory Instrument 826/2005.

Commercial ignorance or negligence by the Revenue has meant that payment is made for the receipt of each and every PAYE file that is processed through the Electronic Data Interchange gateway.

This is regardless of whether the information is deemed to be “unacceptable” to the department’s corporate mainframe systems. EDS, which currently operates this electronic gateway, is paid by the number of characters in the files that are processed, regardless. How many characters would Tesco, Asda or Sainsbury have in one of their PAYE end of year files?

Where an EDI user has an electronic file rejected, they have to pay for the data file to be retransmitted and the Revenue has to pay for it to be processed a second time by EDS. Current guesstimates put the cost to the Revenue for the EDI operation at approximately 50p per Form P14, and it is expected that some 20 million Forms P14 will be processed through this system.

Those using the Internet as a means of communication incur hidden costs where their submissions are rejected, since they will have to undertake “correctional activities,” which cannot be considered free of charge.

Finally, this negligence or stupidity has resulted in the “new computer” system not being operational as at 6t April 2005, despite the fact that the Chancellor announced the introduction of compulsory electronic PAYE filing in the 2002 Budget.

The Inland Revenue invested heavily in the slogan “It’s Quicker, Faster, Cheaper and more efficient Electronically.” Well is it?

ERIC – the Electronic Routing Interface Component (the gizmo which would make everything so much better) was not going to be actually operational by 6 April 2005. The Inland Revenue and its IT partner, Capgemini, were not prepared to deploy a new system without ensuring that it was fully tested and held no nasty surprises. The current estimate of its availability is “late May”, which brings its own concerns.

The fact that ERIC is not currently available means that the Revenue has decided that FEC is the answer – FEC! This stands for Front End Contingency and one has to wonder if the Revenue genius who dreams up these wonderful names would survive long working for the American Inland Revenue Service in the deep (and conservative) South.

The introduction of FEC means that end of year submissions which are sent electronically to the Inland Revenue are allowed to pass through either one of the two Electronic Gateways – the Internet or the EDI route. Since ERIC is currently not operational, the End of Year submissions are being stockpiled, presumably on some vast electronic magnetic hard drive – any offers on it being called VEMHD?

The issue is that while the electronic end of year submissions are languishing in VEMHD (electronic cyber space) the information is not available to staff in HMRC offices.

The suggestion of quicker and faster appears now to relate only to getting the PAYE end of year information to the Revenue. The information can not and will not be dealt with in any way until ERIC is operational.

The effect of this is as follows:
1) An Employer submits their End of Year submission electronically
2) The operation of FEC means that unless the electronic Data File is grossly in error submission is “Accepted”. (Note this does NOT mean that the submission is “correct” and will satisfy Legislative Requirements.)
3) The Submissions lie in “stasis” until ERIC is operational
4) When ERIC becomes operational, all the waiting End of Year submissions will be processed and those which fail to meet the Inland Revenue’s standards will be rejected.

As a result, any employer who submits electronically (and correctly) will not have any of their employees’ tax liability properly reviewed until ERIC is operational. Any employee, who wants an urgent liability review for 2004/05 and can’t produce their P60, will just have to wait for ERIC to be functional.

Any employer who submits electronically and has “errors” will be notified that their electronic submission, which appeared to be received successfully, in fact contained errors and therefore must be resubmitted, when ERIC becomes operational.

You could therefore be in the situation where several weeks after assuming that your electronic submission was in the hands of the Inland Revenue, you are told that your submission is unsatisfactory and does not meet your legislative requirement, so do it again!

The rush to print and explain that there normal rules relating to penalties are not being applied this year is comforting, as long as all the various internal HMRC systems and approximately 50,000 staff conform to this aspiration.

Until the new system is operational, the PAYE payments made during the tax year can not be compared with the payments due, since the information provided by employers is not being passed to the department’s mainframes. This means that HMRC is not in a position to pursue monies due, and therefore we have a potential threat to Exchequer income during the first quarter of the current tax year.

Finally, it is interesting to note that in true Sir Humphrey style, the Revenue’s e-business manager, Joan Wood, and the e-business programme director, Terry Hawes, were promoted in March, just before the off.

About the author
Ian Wheelan is a senior partner in eePIC, the electronic Payroll Implementation Consultants, who provide research and assistance to employer organisations contemplating implementing electronic communication with the Inland Revenue and wanting to realise real and tangible benefits from this change.

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