PAYE gets into debt

Government plans to recover student loans through the PAYE system will cost companies millions of pounds and could lead some employers to stop recruiting graduates, tax experts warned this week.

Under the teaching and higher education bill, currently before the House of Lords, many graduates will repay their student loans through the PAYE system, passing the burden of compliance to Britain’s 130,000 graduate employers.

The government estimates the PAYE system will cost #45-90m to set up, and annual compliance costs may reach #42m by the year 2010. Inez Andersen, tax partner at KPMG explained: ‘Employers will have to do extra calculations, and that will require new computer software and more training, which means considerable capital expenditure.’

The education department has been completely candid about this cost, but Andersen and her colleagues fear FDs and their advisers may not have heard about the bill.

‘What disturbs us,’ said tax partner Leslie Ferrar, ‘is the way this legislation is being introduced – not through tax law, as one would expect, but through an Education Bill which tax directors would not normally look at.’

Andersen added: ‘FDs need to know now, so that they can put the right systems in place. Closer to the time of implementation the payroll people will need to be educated, especially where the calculations are done manually.’

A department spokesman admitted ‘individual employers won’t necessarily have caught up with the proposed changes’ but there would be some publicity prior to implementation in 1999 to explain the changes to employers.

Andersen said employers were fed up with the added burden being placed upon their accounts departments by the current government. She said it was possible some small businesses could be deterred from taking on graduates, especially given that one of the other provisions of the bill was the introduction of a statutory right to ‘fully-paid time off for training’.