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Inland Revenue

Tax Policy

Chapter 5 - PAYE information - implementing change

Threshold for electronic filing
Providing PAYE information when the business process occurs - implementation options
Factors influencing the uptake of software
Financial assistance
IR56 taxpayers

Threshold for electronic filing

The discussion document consulted on reducing the electronic filing threshold for the employer monthly schedule (EMS) from $100,000 PAYE and ESCT to $50,000 a year. Also it asked if such threshold should be based on something other than the value of PAYE and ESCT deductions and if so, what. A process for obtaining an exemption from digital filing would remain, and focus on whether the employer is unable to access digital services.

Summary of comments

Feedback from the online consultation was generally opposed to a reduction in the threshold. Some submitters were opposed to an electronic filing threshold altogether.

Feedback from written submissions was mixed.

“Threshold should remain at $100,000. Was set some years ago and wage increases have eroded this anyway. Some businesses still prefer manual systems to computer software.”

“We consider $50,000 to be an appropriate threshold for filing PAYE information electronically…we consider the number of employees is a viable option. Above a certain number, electronic filing of PAYE information could be compulsory.”

“With the lack of guidance as to whether a drop from $100,000 to $50,000 would make any material difference, we believe it would be more beneficial if any decision on the future PAYE threshold is not made until (a) more information is provided so that an informed choice can be made on an optimal threshold level, and (b) submitters have a better understanding of likely significant changes to PAYE processes so that these can be taken into account when examining a revised threshold.”

“The $50,000 threshold is much lower than the current $100,000 e-filing threshold and is not supported. Our concern is that this will capture very small employers and impose compliance costs on them to upgrade. This will be a “cliff”, from a compliance cost perspective, for an employer who has PAYE obligations of $50,001.” “…the electronic filing option should not apply to businesses with PAYE of $100,000 or less or 3 or fewer employees.”

Providing PAYE information when the business process occurs – implementation options

The consultation proposed three options for implementing the provision of PAYE information at the time of the business process:

1) Voluntary-first approach - Once a critical mass of employers are using the new software the Government may review the situation and require all employers (or all of a certain class) to provide PAYE info at the time of the business process.

2) Legislated approach - Initial legislation would set out dates by which time employers would be required to provide PAYE information at time of business process (possibly different dates for different classes of employers).

3) Review approach – Legislation would be amended to allow employers to voluntarily submit PAYE information when the business process occurs. This would be reviewed 12 – 36 months after introduction and mandated for employers (or certain classes) if the Government concludes that the benefits outweigh the costs. The review approach would have a time-tabled review period from the outset, whereas the voluntary-first approach would not.

Also views were sought on whether employers would seek to change the frequency with which they pay staff, if required to provide information at the time the business process occurred.

Summary of comments

Almost all of the online submitters who responded on this topic stressed that the provision of PAYE information at the time of the business process should be voluntary. This was not necessarily support for a voluntary-first approach which allowed for the possibility of a subsequent legislative requirement but support for employers always having a choice.

The preference amongst the written submitters was mixed. The general consensus was that uptake should be voluntary - however some submitters were of the view that more time is required for large employers and software developers to adapt to the changes and therefore there should not be a set review period.

The feedback in response to whether employers would change pay cycles in response to the requirement to provide information at the time of the business process was mixed. The majority of the submitters who responded to this question said they would not change their pay cycle.

“Agree that the Government needs to be able to balance the employer’s interest in choosing how to provide PAYE information against the wider system benefits. Prefer the voluntary approach. Think Government should require employers to use payroll software capable of providing PAYE information at the time of the business process – but there should be some payback for additional costs. I wouldn’t seek to change the frequency of paying staff if required to provide PAYE information at the time of the business process.”

“have no issue with processing PAYE at same time as doing wages (but don’t think payroll software should be mandatory). May seek to do wages monthly if this was introduced.”

“We recommend the voluntary-first approach…there will be a range of employers with different levels of capability that will need to be accommodated…PAYE technology solutions will need time to develop and gain buy-in…therefore, we do not believe the review period should be time constrained.”

“We prefer that IR adopt the review approach in the first instance, rather than mandating electronic filing of PAYE information. If the systems and processes that IR implements are time saving and user friendly taxpayers will be keen to adopt them. If they are not, further work should be undertaken to ensure that they are useful to business and fit for purpose…over time this would be in the best interest of the tax system. However, we do not believe it should be required at first instance. In our view, it would be preferable to encourage employers to use such software. This would also encourage software developers to develop it.”

Factors influencing the uptake of software

The discussion document asked what factors would influence submitters as to whether or not they would upgrade their software to provide PAYE information at the time the business process occurs. Also, it sought views that if some employers were exempt from the requirement to provide PAYE information at the time of the business process occurs, whether such employers should provide disaggregated PAYE (pay day) information and when that information should be provided by.

Summary of comments

For large employers it was stressed that a long lead in time was essential in order for them to upgrade their software. For smaller employers, the most influential factor mentioned was cost, ease of use and the benefits to the business. A number of submitters mentioned the provisions of free software or Inland Revenue providing a basic payroll system for small employers to use.

“A more realistic timeframe would be around 24-36 months to ensure the transition is as smooth as possible for businesses employing the largest percentage of employees.” (The discussion document referred to 12 – 24 month lead time.)

Other factors mentioned:

“Whether [we] are able to access the new PAYE services (i.e. employers can only utilise the new services once their payroll software provider updates the employer’s current system to take advantage of the new PAYE services);

The timeframe in which their current payroll software provider will upgrade the system to the required standard to access the new PAYE services;

Whether using the new PAYE services is required by legislation;

The cost of upgrading the payroll software system;

Efficiencies achieved in utilising upgrading payroll software to take advantage of the new PAYE services;

Whether the new PAYE services will be easy to use within a payroll software package;

Whether adopters of the new PAYE services experience system ‘errors’;

Potential for disruption and the time it will take for the organisation to implement and adapt to the new computer software.”

“While it is reasonable to expect those using non-digital services to provide Inland Revenue with some of or the same information, there will need to be separate requirements for how this information is to be provided and the timeframe for providing it. In our view, exempt employers will still need to provide some form of non-digital form to Inland Revenue, such as a revised EMS schedule.”

“We support a tax system that is fair, simple to use and efficient. We recognise that moving to digital services will help make this possible, but we also see clients who are at risk of being left behind…we also recommend that, for the small number of people who will never make the transition to the digital environment, non-digital services be available for as long as is needed, without penalty or charge. We do not want to see people forced to use accountants or tax agents, or decide not to bother filing at all, because of the absence of a non-digital option.”

“Most influential factors for determining whether to upgrade will be minimising fixed ongoing costs, access to support, ease of use and interactivity with other systems. If we were required to provide PAYE information at the time of the business process I would consider outsourcing the job.”

Financial assistance

Submitters were asked for their views on whether financial assistance should be available to assist employers to take advantage of the new digital services proposed to modernise PAYE information.

Summary of comments

In the online submissions there was overwhelming support for the Government to provide financial assistance, however a proportion said that financial assistance would not influence them to purchase software. Some submitters were of the view that the current payroll subsidy is too low. Some suggested that Inland Revenue should provide a basic payroll package for small employers to use. The majority of written submitters were silent on the question of whether the Government should provide financial assistance. Those that did submit on the issue were generally supportive.

“Small to medium businesses should have assistance from the government. Any changes made to the tax system should fall on IRD and the government. For example, a new staff member starts. It's up to the employer to provide all the necessary information and equipment related to that job description. You’re the boss IRD. If you want certain systems in place, then it's up to IRD to provide and equip the new system. Our tax system is suffocating small business!”

“We believe financial assistance may be required to compensate for the transitional cost as well as ongoing costs (the latter particularly if employers are to lose the cash-flow benefit from holding PAYE as working capital prior to remittance)…assistance could be targeted by size of business, with smaller employers more likely to be disproportionately impacted by the changes (see also above our suggestion to limit the PAYE proposals to employers with more than 3 employees).”

“This subsidy [the payroll subsidy] should be retained or even increased to assist employers to take advantage of the new digital services proposed to modernise PAYE information.”

“Financial assistance can aid in uptake, also potential assistance to education and upskilling.”

“Yes - financial assistance or a subsidy should be available, particularly if an employer will be required to purchase or modify software. We believe IR should consider building a portal that all employers can access, rather than requiring them to purchase software in order to be able to take advantage of the new digital services. Given Government’s need to remain neutral, we would not support IR favouring or preferring one software provider over another. Subsidies always have issues with targeting. Unless it is a universal subsidy there will be perceptions of inequity. Also any subsidy needs to be paid to employers, not a third party.”

IR 56 taxpayers

The discussion document asked whether IR 56 taxpayers (that is employees responsible for their own PAYE rather than their employer) should remain responsible for their own PAYE, and whether the due date for filing and payment should be brought forward from the 20th of the month following payment.

Summary of comments

Written submissions and most online comments supported the continuation of the current system. However, two online commentators questioned the current system and suggested a schedular payment type withholding tax and an end of year return as an alternative. The consensus among submitters was that the suggested due date of the 5th of the following month would be impractical, with most submitters being of the view that the 20th of the following month remained appropriate for IR 56 taxpayers.

“…I consider the IR56 tax payment model a liability as an employer. Asking people to file their own PAYE is tedious for them to do and me to manage. …I can see no reason why employees who currently fit the IR56 criteria could not be registered as self-employed like so many other freelance workers and either have WHT deducted and/or pay tax at the end of their financial year.”

“We agree that IR 56 taxpayers should remain responsible for their own PAYE information and deductions…we believe that 20th of the month following payment filing is still appropriate.”