Filing Tax Returns and Paying Tax On Time – HMRC consults on a new approach to penalties

Monday, June 30th, 2008

UK flagThere are a number of different penalty structures across the taxes and duties administered by HMRC, the framework and legislation for which were inherited from the Inland Revenue and HM Customs and Excise. As many taxpayers, particularly businesses, interact with HMRC across a range of taxes, HMRC is concerned that the differences are viewed as adding unnecessary complexity and burdens to the tax system.

As part of the review of Powers, Deterrents and Safeguards, HMRC has been developing ideas and consulting on how to modernise and align its civil financial penalties. The first substantial measure, legislated in the Finance Act 2007, was a single new penalty regime for incorrect returns for income tax, corporation tax, PAYE, NICs and VAT. Further measures in the Finance Bill 2008 will extend this approach to other taxes and to failure to notify new taxable activities.

A new consultation document, entitled Meeting the obligations to file returns and pay tax
on time
, was published by HMRC on 19 June 2008. This consultation

  • considers the principles on which a new penalty structure for
    • failure to file a tax return, or to do so on time
    • failure to pay tax liabilities, or to do so on time, and
  • invites comments on measures for delivering a more consistent, fair and effective penalty regime.

The first part of this brief review has relevance to tax returns and payments, such as self-assessment income tax, corporation tax, VAT, PAYE and Construction Industry Scheme, where returns are due by a set date and the payments in respect of that return are due in full by a set date. A separate section of the consultation document considers the special monthly and annual problems raised by the in-year payment by employers of PAYE tax collected on behalf of their employees. Curiously, the current consultation does not extend to NICs or to Student loan deductions, even though they are included in the same returns at PAYE tax. No explanation given as to why they are not included.

Some of the important factors that HMRC’s research indicates should be considered in devising new penalty structures for failure to file or pay on time are as follows.

  • Most taxpayers delay filing their returns until close to the deadline and then fail to file or pay on time because other priorities, such as domestic or business emergencies, arise close to the deadline.
  • Many taxpayers do not understand they need to file a return, the importance of doing so on time or how they should go about doing so.
  • Taxpayers fail to pay their tax on time because they put other financial priorities first, e.g. paying creditors who may stop supply if they are not paid on time. HMRC is unable to stop the supply of services for non-payment of taxes or stop tax debt increasing.
  • There is a difference between those who intend to meet their obligations and those who deliberately fail to meet their obligations, and HMRC’s support and sanctions should accommodate these different types of behaviour.

HMRC suggests, therefore, that the following behavioural patterns should be taken into consideration in devising a new penalty regime:

Payment – those who pay on time pay late through confusion have temporary cash flow problems choose to delay payment are determined never to pay
Filing – those who file on time file late through confusion have other urgent priorities that get in the way choose to delay a return temporarily are determined never to submit a return
HMRC Action Clear obligations Make it easy to comply Time to pay / flexible payments Penalties Enforcement

Other issues raised in the consultation document are as follows.

  • Where taxpayers with cash flow difficulties enter into a “time to pay arrangement”, allowing them to make their payments in instalments over a period of time, what penalty regime should apply if the arrangements are not adhered to?
  • As it would not be cost effective to consider the underlying behaviour of each taxpayer before applying penalties and, as a result, penalties will likely be issued automatically, what safeguards would be appropriate to protect the taxpayer? A “reasonable excuse” provision is included in the Finance Bill 2008.
  • Should the “capping” of penalties, where the maximum penalty is limited to the amount of tax unpaid, be retained? This procedure currently applies for both PAYE and NICs.
  • Should there be further penalties for taxpayers who repeatedly file or pay shortly after the due date, such as higher penalties the second or third time?

The different “tools” available to HMRC to tackle late filing and payment are:

  • determinations or assessments
  • fixed sum penalties
  • tax geared penalties
  • daily penalties
  • enforcement action.

Using a combination of these different “tools”, HMRC suggests two new penalty structures that involve a sequence of penalties and that are designed to influence taxpayer behaviour.

Late or non-filing

  1. an initial fixed penalty for failure to file on time
  2. a further fixed penalty, perhaps a month later, if the return is not filed quickly
  3. a tax-geared penalty for continued failure, after a further 6 months
  4. a further tax-geared penalty, at a higher level, after perhaps 12 months
  5. assessments or determinations could be issued by HMRC at any time
  6. daily penalties, without the need for pre-authorisation by the General or Special Commissioners (as is currently required), for those who persistently fail to file.

Late or non-payment

  1. an initial fixed penalty for failure to pay on time
  2. a tax-geared penalty for failure to pay after 1 or 2 months
  3. a further tax-geared penalty, at a higher level, after perhaps 6 months
  4. a further tax-geared penalty, at a higher level, after 12 months
  5. enforcement action, at any time, if it is clear that there is no intention to pay.

A suggested refinement to the tax-geared penalty is to relate it to the degree of lateness by accruing the penalty on a daily basis, and charging it to the taxpayer at fixed intervals.
Any new penalty structure would include protections for taxpayers, with facilities for appealing against penalties.

Payment of PAYE tax
The proposals described above are not directly relevant to the payment of PAYE tax, collected by employers on behalf of their employees and paid monthly or quarterly to HMRC’s Accounts Office. HMRC’s sees the design of appropriate sanctions for late or non-payment of PAYE tax as a “significant challenge”. Employers are required to pay monthly or quarterly during a tax year but are not required to file their P35 return to indicate the amounts collected until after the end of the tax year. HMRC cannot, therefore, know whether the employer is paying the correct amount each month or quarter during the tax year.

The proportion of taxpayers currently paying their in-year PAYE on time is significantly lower than the proportion paying other taxes on time, at around 60% (apart from large employers, where it has increased to over 95% as the result of special payment compliance rules).

The Public Accounts Committee and the National Audit Office have previously noted the challenges faced by HMRC in ensuring timely payment of in year PAYE and recommended that surcharges be used to tackle late or non payment. Statutory surcharges are already used to enforce the payment rules for “large” employers with 250 or more employees.

HMRC’s view is that some of the penalty “tools” already described may be applicable to PAYE, i.e.

  • fixed penalties,
  • tax geared penalties
  • enforcement action, in conjunction with compliance visits.

However, before these tools can be used to tackle late or non-payment, the issue of how HMRC can determine whether the in-year payments are correct has to be addressed. The consultation document makes three suggestions.

  1. Extend the statutory late payment surcharge arrangements for large employers to medium-sized employers, i.e. those with between 50 and 250 employees, after first reviewing the effectiveness of the existing system and making any appropriate changes.
  2. Require employers to file a short monthly statement that sets out how much PAYE tax is due and the basis of the calculation.
  3. An estimation by HMRC of the tax due each month, based on previous payments and the previous year’s return, and charge interest and/or a late fixed-sum or tax-geared penalty on any shortfall. Employers would have to provide actual figures for the month concerned in order to have the penalty cancelled.

HMRC acknowledges that these options have the potential to create additional work for employers and is asking for views on the best way of encouraging employers to pay their in-year PAYE in full and on time, without creating unreasonable burdens for them.

The consultation document is available at the link given below. Comments should be received by 11 September 2008.

Further information:
Meeting the obligations to file returns and pay tax on time
View the previous news item for Compliance


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