The first decade of the 21st century will be remembered by payroll managers as a period of unprecedented change. The Working Families Tax Credit went through several phases between 1999 and 2006, when payments via employers were phased out. Extended maternity (and paternity) payments were introduced in 2004, while the years between 2005 and 2010 will be remembered as the start of the age of online PAYE filing.

All these policy changes have filtered through to the managerial structures and business processes of many organisations and stimulated wide-reaching shifts in the electronic systems used for payroll management.

For software developers, change is good. It presents them with the opportunity to sell more products, explains Dennis Keeling of the business software trade association BASDA.

“They’re all prospering – this is the biggest boom they’ve ever known in payroll,” Keeling says. “With all these changes, people are having to upgrade their payroll software. Even employers who used to do it themselves can no longer use their old fashioned systems.”

The hero for these suppliers – and the villain for payroll managers – is Lord Carter of Coles, whose 2001 review of payroll services sought to encourage companies to file PAYE returns electronically with a combination of carrots and sticks (see box below). A “Carter 2” report, published by the Treasury alongside the 2006 budget, extended the initial regime from end of year (P14 and P35) forms to in-year forms (P45 and P46 and a few others).

The Carter 1 proposals were an astonishing success. More than 60% of companies shifted online in 2005. For HMRC, however, the surge came with a sting. It had not anticipated quite such an enthusiastic response and its systems were swamped by the volume of returns from smaller companies who went online early. The government ended up paying more than £225 million in incentives to small businesses that year (Hansard 8 Jan 2007).

It wasn’t just payroll software developers who prospered. Payroll is complex enough, but online filing brought new complexities such as installing suitable systems, configuring internet connections and acquiring user IDs and passwords. Then all the data submitted to HMRC needs to be validated and double-checked for a wide variety of errors that can cause a filing to fail. It’s no surprise, then, that the great online migration saw a big swing back towards the traditional payroll bureau, and its more sophisticated siblings, payroll and full service HR outsourcers. According to internal HMRC information, the majority of online submissions are now made by bureaux and agents rather than individual companies.

Offloading payroll and HR processes to specialists can free a company’s managers to focus on more strategic areas, the sales pitch goes, and it eliminates the need to spend all that time and money tending IT systems. While the appeal may be most obvious to small companies who do not have enough employees to hire internal payroll managers, the large outsourcers confirm that the headaches are much bigger and more complex for large organisations.

Whichever route is chosen, new management approaches are needed in the fast-moving world of payroll, for example to establish and monitor service level agreements with third party payroll providers, or to take responsibility for new internal systems.

The great payroll reorganisation has prompted many companies to review their arrangements and consider the role payroll plays within their organisations. In the past payroll has been an accounting function.

But that thinking does not chime with specialists, who point out that payroll is usually the biggest single cost, and one of the most important functions in an organisation. With the requirement to hold more and more personal information on things like maternity benefits, student loans, sickness and absence, payroll has been evolving into more of an HR function than a finance task.

Yvette Lamidey, a director with Paris & Parks Consulting, comments: “I do not hold truck with the idea that you can’t trust HR to get their data right. HR managers have to get their data right. They’re already responsible for hiring and firing and it’s about time we say that that’s their area.

“I’m quite radical and think data should only be held once – in the HR system, which should be the driver. All you should put on the payroll is statutory data and variable information. Address changes and any of the people stuff such as salary changes should come through from HR. If you haven’t got an integrated system, but have links between the software, you can still do that.”

Carter 2 – you ain’t seen nothing yet
With just over a year before the requirement to file in-year forms (P45(1), P45(3), P46 and PENNOT) online (1 April 2008 for large and medium businesses), the number of systems and software providers who have cleared the HMRC’s test regime for all the relevant forms is around 29. It’s not the end of the world if a system does not comply as the HMRC’s portal has online forms for entering the data, but it makes much more sense to output the relevant files while the processing takes place, rather than having to sit down afterwards and type figures on to the screen.

Paris & Parks director and payroll expert Yvette Lamidey confirms that Lord Carter is having an impact on the payroll market, to the advantage of providers who are ready for the in-year forms.

“For larger organisations, it’s going to be something you expect – but what added value can the developers give people?” she says.

“There have to be other reasons for larger organisations to make the transition because of the amount of money it costs to go from one system to another. You’re not going to spend £100,000 installing a system to do end-year filing if you are getting what you want from your existing payroll/HR system. Some organisations took the £3,000 hit for a couple of years before they migrated to a new system.”

Andrew Dove, legislations specialist with Intex software says that often payroll software will act as a “stepping stone” to other software upgrades. “In some cases the legislative cycle governs the upgrade process. A company will start will payroll this year, and if it’s a payroll package that works with a particular accounts or HR system they can add those modules on later.

“If the organisation puts more emphasis on payroll, it can have more of a driving effect on the business’s practices.”

So you can expect to see some friendly and enthusiastic faces from payroll software and service providers in the next few years.