Select Committee on Economic Affairs Third Report



  6.1  The Explanatory Note on Clause 201 states that it allows the Inland Revenue to require large employers (defined as persons paying PAYE income to 250 or more recipients[43] to use electronic means for the making of payments.[44] The Clause gives regulation-making powers covering such things as the specification of acceptable methods of payment[45] and the imposition of a surcharge for failure to comply.[46] By way of background, the Note states that regulations under the Clause will provide for payments to be made electronically from April 2004.[47]

  6.2  One witness spoke for a majority of our respondents, when he stated: "Electronic methods are the way forward, but we question why compulsion is necessary (with implicit or actual penalties for failure): should not the route be to make systems so attractive (and guaranteed robust) that all will want to use them?"[48] Another witness, while echoing that view about the use of compulsion, was critical of the detail of the penalty regime for failure to comply. He said that a fine of up to 10% of the tax payment was entirely disproportionate for a regulatory failure of the type.[49] Some concern was expressed to us about possible practical difficulties for businesses which were on the borderline (about to become "large employers") or those which might take on significant numbers of seasonal employees (Q 164).

  6.3  However, another respondent took a more pragmatic and open view about the possible need for compulsion at the margin in the interests of good administration (Q 581).

  6.4  Our attention was drawn to the Inland Revenue's Partial Regulatory Impact Assessment (PRIA), where the rationale for the introduction of this measure was stated as being to ensure payments of PAYE and NIC are prompt and secure [PRIA, paragraph 1] and to eliminate the cash flow costs of postal delays and cheque clearance [PRIA, paragraph 3]. One witness, basing himself on the Inland Revenue's own analysis of the problem in the PRIA, suggested that it was two-fold, namely cash flow and late payment. By dealing with each separately they could be tackled as effectively as by the Clause, but without the undesirable element of compulsion as to use of an electronic method of payment. He argued that the cash flow problem could be solved by making the due date of payment the date when the funds were cleared, instead of the date of receipt of the cheque. And the late payment issue could be dealt with by the imposition of an interest charge or penalties or both (Q81).

  6.5  Dave Hartnett (Inland Revenue) told us that about a third of all "large employers" still paid by cheque because of the cash-flow advantages to them. The normal delays associated with posting letters in remote locations were being exploited by certain employers. So were those delays inherent in the cheque-clearing system itself. Clause 201 was intended to remedy these shortcomings. He acknowledged that an alternative approach using "date of cleared funds" as the due date, might have worked, but mandatory electronic payment was already the law for VAT, and an Inland Revenue precedent existed in the Tonnage Tax. Ministers had opted to follow that route (QQ 777/8 and 784).

  6.6  The discussion was set in context for us by an article in the Inland Revenue Employer's Bulletin for May 2003. This sets out a timetable to extend the related procedure for electronic filing of employers' returns, for which the legislation is already in place. A rolling programme provides for compulsory electronic filing of returns as follows: 250 employees or more, deadline 19 May 2005; between 50 and 249 employees, deadline 19 May 2006; fewer than 50 employees, deadline 19 May 2010. We noted, particularly, that financial incentives are being given to employers with fewer than 50 employees to file electronically earlier. This demonstrated to our satisfaction that the Inland Revenue were alive to the advantages of a carrot and stick approach.

  6.7  We concluded, in the light of what we had been told by the Inland Revenue, that it would not have been appropriate to offer a financial incentive to encourage large employers to switch more rapidly to electronic payment.

43   E.N Clause 201 paragraph 3. Back

44   E.N Clause 201 paragraph 1. Back

45   E.N Clause 201 paragraph 4, first indent, concerning subsection 3. Back

46   E.N Clause 201 paragraph 9 concerning subsection 8. Back

47   E.N Clause 201 paragraph 14. Back

48   See evidence by PricewaterhouseCoopers (Volume II, HL Paper 121-II). Back

49   See evidence by Institute of Chartered Accountants in England & Wales (Volume II, HL Paper 121-II). Back

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