How to… Use an e-filing system for payroll

Most employers have just two years to brush up their payroll act. Electronic
filing of end-of-year returns will be mandatory for employers with more than
250 staff from May 2005 – a tight timeframe, according to those who have blazed
the e-filing trail.

The rush by companies to install systems capable of handling e-filing
resulted from a dual challenge set to businessman Patrick Cartner by the UK
Government in June 2001: to find out how to make it easier for employers to
fulfil their payroll obligations while reducing payroll costs to businesses and
the economy.

Cartner’s answer was simple – more technology. The introduction of mandatory
electronic filing of end of year returns by employers was one of the key
proposals in his review of payroll services, published in November 2001.

What is e-filing?

Electronic filing – e-filing – simply means sending information to the
Inland Revenue (IR) from your organisation’s computer using an electronic link.
Magnetic media (flexible disk, CD Rom or data cartridge) will not be accepted

Employers must submit end of year returns (P35 and P14 forms) by one of the
following methods:

– Filing by internet (FBI)

– Electronic Data Interchange (EDI)

– By FBI or EDI via a payroll bureau or agent.

To use the internet service, employers need to register with the Government
Gateway – the centralised registration service for e-government services.

How long do we have?

Employers with 250 or more employees in the PAYE scheme must submit 2004-05
end-of-year returns by 19 May 2005. Those employing 50 to 249 and those with up
to 50 staff have until 19 May 2006 and 19 May 2010 respectively. In addition to
the existing late filing penalty, there is a fine of up to £3,000 for failing
to meet the appropriate deadline.

Which method is best for us?

Deciding which service to use is very much down to the individual
organisation and its size.

Larger employers and those already with an EDI facility are likely to find
EDI most cost-effective, while employers with less than 2,000 records for
end-of-year returns will be wise to go the internet route.

This leaves a vast number of mid-range employers who need to do some

Those outsourcing need to check their bureau is e-compliant, and those
running payroll in-house need to ask which service (EDI or FBI) their software
provider can support.

To file by internet, you will need an ISDN line or a dial-up modem (VAN) –
payroll requires its own to satisfy the Data Protection Act.

All EDI files must be either in generic Flatfile form or EDIFACT. If you
cannot retrieve files from the payroll system in this format, you will have to
buy in translation and communication software.

What will we be spending money on if we do e-filing ourselves?

– Upgrading/buying a new payroll system

– Buying translation and communication software and hardware to house this
new software

– Increased software licence fees

– Telephone calls to send data

– Maintenance of VAN

– General annual maintenance costs

Where do I get more info?


– The Inland Revenue’s Electronic Business Unit, tel: 0845 6055999


If you only do five things

1 Plan well

2 Liaise with all third parties, including the Inland Revenue

3 Get buy-in from senior management

4 Do it early, otherwise the Inland Revenue will be too
inundated to give you the resources you need

5 Look carefully at costs and consider outsourcing if it
doesn’t all add up

Experts view
Kate Upcraft on e-filing

Kate Upcraft is policy and research manager at the 5,000-strong Institute
for Payroll and Pensions Management and former payroll legislation manager at
Marks & Spencer.

Do you think industry is geared up for e-filing?

By 2009-10, there will be no paper returns at all. We’re talking about 1.2
million employers. I think it is a massively ambitious project and I have grave
concerns about whether it is achievable.

Bringing in incentives for the smallest employers has caused some disquiet
in the business sector. Small employers get money, while for very large
employers like WH Smith, there are clear paybacks from using e-filing for all
employee ‘movements’ (any new data on employees, such as a company car or new
tax credit). But all other employers face considerable costs. Many are saying
‘we already use technology, magnetic tape, isn’t that enough?’

Any words of warning?

Employers must do end-of-year returns for all employees, including
pensioners. They must also make sure they submit clean data only. Their
submission must pass the Inland Revenue’s validation the first time.

There are many organisations, such as retailer John Lewis, whose bespoke
payroll systems work well. But they need to be careful, as it may not be suitable
for this new scenario.

Find a friend in your sector who has taken the plunge. The IPPM can point
you in the right direction.

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