Chapter 5 - The PAYE system and facilitators

5.1 To demonstrate the Government’s proposed new direction for interactions between taxpayers and Inland Revenue, this chapter sets out an example of how the PAYE system might be reformed. The proposals outlined in this example could be applied to other tax types in the future.

5.2 The main tax form employers use, the employer monthly schedule, was introduced in 1999 as a result of changes proposed in the discussion document Simplifying taxpayer requirements. Its purpose was to provide an efficient mechanism through which Inland Revenue could interact with employers in the collection of employee information and payments.

5.3 The employer monthly schedule sets out the PAYE deducted from each employee’s pay, as well as child support, student loan repayments and KiwiSaver contributions. Approximately 41 percent ($22 billion) of Crown revenue is collected through the PAYE system. Of the 180,000 schedules received by Inland Revenue each month, only 30 percent are received electronically (although these schedules represent 80 percent of employees).

5.4 Processing paper schedules in an efficient and accurate manner requires significant resources. Further, to minimise compliance costs, Inland Revenue takes responsibility for correcting the majority of any errors found in schedules.

5.5 Inland Revenue has a first-generation electronic interface for employers and payroll specialists, called ir-File, which allows employers to file their employer monthly schedule electronically. The system allows only limited at-source validation. Inland Revenue therefore still has to apply extensive manual effort and reprocessing to correct information received through this system.

5.6 With the introduction of KiwiSaver, the employer monthly schedule was amended to collect additional information. A review undertaken by Inland Revenue on the current state of the schedule has highlighted that the collection of additional KiwiSaver information has added complexity to the form and is putting increased pressure (especially at peak times) on the existing paper-based employer monthly schedule process. Further, Inland Revenue’s systems are now at capacity.

An electronic PAYE system

5.7 Some employers use payroll software, perhaps as part of their general accounting software or as a standalone program, to prepare their PAYE information. Some employers also use bureaus, which support employers through the entire payroll process, to prepare PAYE information. The software or bureau services these specialists provide are diverse. Some specialise while others provide a wide range of services. The manner of serving their customers can range from simple to complex web-based services, phone or fax.

5.8 One thing these specialists have in common is to make their processes as simple as possible for their customers. To do this many of them undertake customer research, user testing and monitoring, and provide call-centre assistance. This has a high level of positive influence on the collection of PAYE.

5.9 Inland Revenue has consulted with some software developers and payroll bureaus to better understand their experiences with the PAYE system. In general, they consider that Inland Revenue’s systems have problems relating to reliability and speed. They are also concerned that their software can have only limited electronic interaction with Inland Revenue’s systems because of its age and lack of flexibility.

5.10 The software developers and payroll bureaus consulted with generally felt under-recognised by Inland Revenue given the importance of their role. A significant concern was that they are restricted in their ability to act for their customers.

5.11 They also believe that Inland Revenue is slow to change and still designs in a paper-based rather than electronic environment. One example raised was that Inland Revenue took paper processes and simply put them online as rather than fundamentally re-designing the process in an electronic environment, with its associated benefits. There are also concerns about the cumbersome way Inland Revenue deals with exceptions or innocent errors. Their underlying concern is that Inland Revenue has significant system constraints which limit their customer service options.

5.12 Those consulted universally considered there are considerable opportunities to use technology to fundamentally reconstruct and automate business processes to bring benefits to their customers and Inland Revenue.

Integrating payroll businesses into the centre of the PAYE system

5.13 Under the proposed move towards electronic tax interactions, technology and payroll businesses would be integrated into the PAYE system. This would increase certainty, speed of interactions and provide employers and employees with greater trust in the PAYE system.

5.14 The Government sees this approach as releasing the creativity, customer focus and efficiency of the private sector to support employers and Inland Revenue. That is, PAYE transactions would occur through services provided by the private sector rather than Inland Revenue. Employers would use software provided by a developer to manage their PAYE, in near real-time, and without the need to fill in forms. The software would be developed with support from Inland Revenue and with the ability to access Inland Revenue information. The ability to interact with Inland Revenue’s systems would only be available for approved software, and with the appropriate regard for privacy.

5.15 Implementing such a change would require:

• payroll businesses to be able to provide their customers with a fully electronic interaction between Inland Revenue and the payroll business if needed;
• mechanisms to ensure accurate data is sent and received by all parties in the system;
• automation of electronic payments to Inland Revenue and embedding that process in software so that it is transparent to the employer (beyond notification of the amount and timing of payment);
• validations and exceptions being addressed via the software used by the employer or payroll bureau, rather than by Inland Revenue at end of the PAYE process as is currently the case;
• an ability for payroll businesses to electronically access Inland Revenue systems (with appropriate access/management rights built in) and update information, action changes, check data and perform maintenance;
• the option of a pay period-based exchange of data and information in addition to the current employer monthly schedule so employers would have certainty faster than is currently the case; and
• structured electronic information requests from Inland Revenue to reduce ad-hoc information requests going directly to employers.

Proposed changes for Inland Revenue, payroll specialists and employers

New technology for Inland Revenue

5.16 Inland Revenue would introduce a business-to-business link that would be used by payroll specialists to transfer information to their software and to employers in real-time. The information and payment processes associated with PAYE would be integrated into employers’ payroll software and effectively become “invisible” as the employer’s PAYE obligations would be met automatically as part of completing their payroll requirements rather than as a separate tax process.

Improving Inland Revenue services to payroll businesses

5.17 Inland Revenue would work with payroll businesses to ensure the tax system is responsive to their needs, with increased tax-technical support for this group and faster responses to queries. The most significant change would be that Inland Revenue would be open to collaborating with payroll specialists on opportunities to streamline the PAYE system. For example, responding to a technology limitation identified by payroll specialists.

New services by payroll businesses

5.18 If the proposed changes go ahead, payroll specialists would be able to start making use of the new capabilities Inland Revenue will be able to offer. For example, payroll specialists would be able to extend their software to “interrogate” Inland Revenue’s new systems to provide an employer with a tax code for a new employee in a timely and secure way. Payroll systems would need to pass integrity checks – for example, provide audit trails and not allow actions by employers that are non-compliant. Currently, some software allows employers to replace the calculated PAYE with a manually calculated PAYE amount and provide that information to Inland Revenue. This would be unacceptable as there is a high risk that the information provided in these circumstances could be wrong. The reason this option currently exists is to allow people to correct small errors. The solution is to provide a better, more accurate way for taxpayers to self-manage their tax affairs.

Quality management and improvement process

5.19 A voluntary quality management system would be available to ensure the quality of software, underlying business processes and information received by Inland Revenue are correct. The proposal is for a formal set of standards which software developers and payroll bureaus would be required to meet and which can be built into their products. This would acknowledge that the standards have been met, by means of a logo or other quality assurance mark. Submissions on how this quality management process would best work for all parties are welcomed.

5.20 It is important to note that the objective of the proposed changes is to increase certainty without adding any undue delay or unnecessary expense to payroll specialists. Therefore, it would not be compulsory to undertake this process. Rather, payroll specialists could choose this option if it made business sense to them. However, certification as part of the quality assurance aspect of the proposed changes could have benefits to employers – for example, the removal of the risk of certain penalties for employers who chose to use certified software.

Supporting the transition to an electronic environment

5.21 The move from paper-based systems to an electronic environment will require significant resources and effort from both Inland Revenue and the private sector. Over the next few years, many employers would need to transition to services provided by payroll specialists. Comments are welcomed from payroll specialists on how this transition should be managed, and what timeline for this transition of employers and payroll specialists would be considered reasonable.

5.22 Views are also sought on the likely approaches that would significantly increase the adoption by employers of the proposed new electronic services. This includes suggestions on how incentives might be used.

5.23 It is appreciated that some people may not be able to make the transition to an electronic environment for a number of reasons. Comment on how the needs of this group might be managed in ways that would still provide improved services for this group, while still allowing Inland Revenue to capture efficiencies through reducing the use of paper, are also welcomed.

Reference group

5.24 To achieve the changes proposed, Inland Revenue would establish a payroll business reference group which would work to design the technology and tools required. The work of this group would be publicly available to ensure transparency and ensure that no commercial advantage is gained. Suggestions on how this communication should be achieved are welcomed. For example, should Inland Revenue establish an online forum for payroll businesses?

5.25 Inland Revenue would chair this reference group, which would have no more than 10 members who would be willing to commit time and resources to achieving the Government’s objectives for greater efficiencies in the tax administration system.

5.26 Once implementation is complete there would be continuing private sector representation in this group to ensure that the goals of the reforms are achieved.