HMRC Relents on Multiple P35 Penalties

HMRC has agreed a new approach to PAYE late filing penalties with professional tax bodies to lessen the number of companies receiving notices for £400+ fines in September each year.

As part of its initiative to improve service standards, the tax department worked with the bodies to tackle some of the most aggravating issues, one of which was the way companies were hit by hefty fines out of the blue.

The issue has become increasingly sensitive as tribunals have taken to dismissing penalty levies where the judge thinks HMRC's approach amounts to revenue-raising rather than enforcing the deadline, as documented during the past year in AccountingWEB's Reasonable Excuse scorecard.

To encourage employers to comply with the 19th May PAYE filing deadline, Taxation reported a statement from HMRC and the tax bodies which said it will undertake to:

• Change the notification date for 2011/12 P35 annual returns from mid-February to mid-March 2012, so that employers will receive it much nearer to the end of the tax year.
• Annual return reminders will be sent out from 28th April 2012, where HMRC thinks there are outstanding P35s for the year.
• From 31st May 2012, HMRC will introduce a "P35 Interim Penalty Letter" that will go to employers within a month of the filing deadline.  The letter will tell employers they have incurred a late return penalty and explain what to do to avoid it increasing.
• Improve online guidance for submitting P35s online, including specific advice about the test-in-live service to reduce the number of employers who believe their test submission is the live submission.  "The on-screen messages within the HMRC online product will also make it much clearer that even when a successful test transmission has been made, a live transmission is still required.
• Instruct Employer Helpline staff to tell employers about filing dates when setting up new employer schemes, to help them avoid a penalty.
• For next year, improve the information on the P35 and the reminders to include a warning that the first penalty notice will cover four months.

"Taken together, these measures should help employers to avoid incurring unnecessary penalties and significantly reduce the number of cases where penalties in excess of £100 are charged." HMRC said.

More on PAYE Filing Penalties

Recent Tribunal decisions on penalties for PAYE returns that are filed late are inconsistent, and the taxman should issue penalty notices to taxpayers more promptly after a deadline is missed, a senior tax accountant said.

As HMRC prepares to challenge a tribunal ruling that criticized its practice of allowing fines to accumulate before issuing penalty notices, recent tribunals have reached different verdicts on the increasingly controversial subject.

Chas Roy-Chowdhury, head of taxation at the ACCA accountancy institute, said tribunal decisions on penalties were "all over the place".

The taxman should be more understanding if businesses make an honest mistake when submitting end-of-year P35 returns - which show employees' income tax and national insurance contributions - Roy-Chowdhury added.

For example, some businesses, or their tax advisers, may mistakenly send a "test version" of their P35, wrongly believing that they have completed the return.

In Croydon North Conservative Association v commissioners for HMRC - heard in the first-tier tribunal last November - the association appealed against an "unfair" £800 penalty for a P35 return that was filed late.

The employer filed their P35 online on 30 March 2011 - more than ten months after the 19 May 2010 deadline for sending the return.

The association appealed against the fine, arguing that its treasurer had no experience of PAYE. It also said that HMRC had taken eight months to notify it about the fine and that an earlier call or letter explaining that the P35 was late would have solved the problem.

The tribunal ruled in favour of the taxman, concluding that penalty notices were not intended to serve as reminders and that burden was on the taxpayer to establish a reasonable excuse for late returns.

In another case about tax penalties - Global Legalisation Services Limited v the commissioners for HMRC - heard in the first-tier tribunal last August - a company successfully appealed against a £800 penalty for a P35 form that was sent late.

The company's tax adviser said that it believed it had filed the return successfully.

After sending the the P35 return online the agent received an email from HMRC confirming receipt but warning that if the submission was a "test submission" the form should be resent using the "live transmission" in order to be processed.

HMRC said that sending a "test submission" requires the employer to "actively access test mode on the system" - meaning that the employer does not have a reasonable excuse for sending the form late.

Roy-Chowdhury said that the taxman should be prepared to reduce tax penalties to encourage people to file late returns quickly.

"When HMRC issues penalties [for late filing of a P35 form] it could say there is a £500 penalty but if you file within 30 days you will pay £100," he said.

A plan to collect income tax and national insurance contributions from employees' pay packets in "real time" rather than annually should make it easier for HMRC officials to send tax reminders and penalties quicker. The new system is due to start from April 2013.

Under real-time PAYE, employers will send HMRC information about tax and other deductions from employees' pay when, or before they make the salary or wage payment to the employee, rather than sending returns at the end of the year under the current system.

The rules on being late with PAYE & NIC payments

We have become aware that some businesses are wrongly interpreting the rules regarding late settlement of monthly or quarterly PAYE payments.  HMRC expect that deductions made from employees for tax and NI in one month should be correctly accounted for and paid over by 22nd of the subsequent month.  The penalties regime was extended to include late PAYE returns in 2009/10 and many late penalties of up to £400 were publicised in the press recently.

There does however seem to be some confusion regarding an HMRC concession which states that for one payment only each year, if it is made late, they will not seek to impose a penalty.  This means that HMRC still expect the payment to be made within reasonable time NOT as some people seem to believe, that a whole month's payment can be deferred until month 12 without a penalty as long as all other payments are made on time.

HMRC deadlines contains further details.

Special Notice about Electronic PAYE payment dates

To avoid paying late you must make sure HM Revenue & Customs (HMRC) have cleared funds by the due date.  If you pay electronically this is the 22nd of each month.  However, when the 22nd falls on a non banking day, (weekend or bank holiday), HMRC must have cleared funds by the last bank working day before the 22nd.

For example:  2011-12 PAYE month 6 for the period ended 5 October 2011. 

The due date of 22 October 2011 fell on a Saturday - a non banking day - if paying electronically, your PAYE payment must have cleared HMRC's bank account by Friday 21 October 2011.

You may therefore need to change any automatic payment dates to ensure you pay on time.  If you do not do so, you will be noted by HMRC as paying late, and late payments for this tax year may result in a penalty being charged.

For further details go to:  Late Payments

Annual PAYE reconciliation process causes another media storm

The current news headlines are once again full of horror stories claiming millions of people have underpaid tax through the Pay As You Earn (PAYE) system, while others are due repayments. The real issue relates to how many of these under and over payments have been caused by errors and glitches in HMRC’s new computer system, rather than the tax system operating as intended with HMRC undertaking reconciliations of taxpayer’s positions after the end of the tax year?

The 2010/11 PAYE reconciliation process is currently underway. We understand that all 2010/11 repayments have been dealt with; there were 2.3m of them and the average tax repaid to taxpayers was £297.

HMRC is now concentrating on the underpayments. 1.2m of these have been identified and the average tax underpaid is £512, about half of the underpaid tax identified in the 2009/10 process. For 2010/11, HMRC is using a de minimis of £50, below which it will not reclaim underpaid tax shown up by the reconciliation process. The de minimis for 2009/10 was £300.

HMRC has always endeavoured to reconcile individual taxpayers’ PAYE records, comparing the tax deducted under PAYE with other data which HMRC holds about that person’s income. Some years ago, before everything was computerised, this was done manually and was extremely labour intensive, taking many months. HMRC inevitably struggled to keep up and fell behind as the organisation was downsized.

HMRC finally installed its new NPS (National Insurance and PAYE service) computer system in summer 2009, with the aim of improving the operation of PAYE. The PAYE system has never catered well for people with more than one employment or pension, and this was not helped by having different employments/pensions dealt with by different tax offices which did not always communicate. The NPS brings together all a taxpayer’s records and so makes sure that allowances and tax rates are operated correctly across all employment or pension income sources.

The NPS has the ability to perform automated end-of-year reconciliations and send out calculation forms, P800, to those taxpayers who have under or over payments of tax for that year.