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Meeting the Obligations to File Returns and Pay Tax on Time – HMRC consults further on a new penalty regime
Monday, December 8th, 2008
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In June 2008, HMRC published a consultation document that explored the circumstances in which taxpayers should become liable to civil penalties when they do not meet their obligations to submit returns and pay the tax they owe on time. New penalty regimes have already been introduced, in the 2007 and 2008 Finance Acts, for submission of incorrect returns and failure to notify HMRC of a new taxable activity.
The new consultation document reviews in great detail the responses to the earlier consultation and proposes a number of possible “late filing” and “late payment” models for the future.
Late filing
The first model would apply to late filing of annual and one-off returns. Among the different taxes that would be affected by this model are end-of-year P35 returns and pension scheme returns. The model involves the imposition of different kinds of penalties at different points in time after the due date, as follows:
- a fixed sum penalty of £100 immediately after the due date
- a fixed daily penalty starting three months after the due date and charged for up to three months
- a tax-geared penalty, i.e. a percentage of the tax due on the return, seven months after the due date
- a further tax-geared penalty twelve months after the due date, with the possibility of behaviour-related higher percentage penalties (up to 100%) if it can be shown that the non-filing was deliberate or the taxpayer has actively sought to conceal the tax liability.
Other models are proposed where there are quarterly or monthly return obligations. In the case of Construction Industry monthly returns, the regime would involve:
- escalating fixed penalties immediately after the due date which are related to the number of defaults in a rolling twelve-month period
- a tax-geared penalty, i.e. a percentage of the tax due on the return, six months after the due date
- a further tax-geared penalty twelve months after the due date, with the possibility of behaviour-related higher percentage penalties (up to 100%) if it can be shown that the non-filing was deliberate or the taxpayer has actively sought to conceal the tax liability.
Late payment
The models proposed for late payment of annual and one-off obligations, and of quarterly obligations, are not relevant for in-year PAYE payments and Construction Industry payments. A special model is proposed for these payments. Identifying late payments is a particular challenge because, although payments are required monthly or quarterly, the P35 return is only due after the year-end and there is no way of checking whether the payments are correct without a time-consuming and expensive audit of an employee’s records.
The three proposals included in the earlier consultation, i.e. monthly statements, monthly estimates and extension of the large employer surcharge) were unpopular in the responses, but a more satisfactory fourth option was proposed by a significant number of respondents.
To overcome the problem of HMRC not knowing how much is due each month, this proposal involves requiring employers to report some additional information either on or alongside the end of year-end P35 return. This would be the amount due to be remitted to HMRC for each month of the tax year. The monthly figures would be an aggregate for each month, and not split into PAYE, NICs, student loans, statutory payments or CIS payments, nor by employee. HMRC would be able to reconcile this expanded end-of-year return with the in-year payment record and identify any discrepancies, e.g. month 4 payment received 3 weeks late. Interest would then be charged (or paid) together with late payment penalties, if appropriate. (See the item Harmonising Interest Charges on Late Payment of Taxes for more information on the interest charge proposals.)
If payments are repeatedly late, or the delay in payment is prolonged, a further model is proposed which would make employers subject to late payment penalties in a similar way to other taxes. The proposal is that
- if there were only one late payment in a tax year, there would be no penalty
- if there were more than one default, the penalty would be calculated by
- calculating the total amount of tax paid late in the 12-month period (excluding tax for the first default), and
- multiplying a percentage that increases the more defaults there are in the year.
This process would replace the current large employers’ surcharge, applicable to employers with over 250 employees) and could apply to all employers, although there may be some exceptions and a variation would be needed for employers that pay quarterly. More significantly, the new penalties would be related to the amounts unpaid, not to the total liability for the year as shown on the P35. It would therefore be a more proportionate response than the current large employers’ surcharge.
In addition, to address very late payment, it is proposed that
- a tax-geared penalty would be imposed for any amount remaining unpaid six months after the due date, and
- a further tax-geared penalty would be imposed after twelve months, but at a higher percentage rate.
Example
The following example compares how a large employer (more than 250 employees) who pays in-year PAYE late is treated under the existing regime and would be treated under the new in-year PAYE model.
Current regime:
- The first two late payments in a year receive no penalty.
- Thereafter, the employer would be charged a penalty after the year end, calculated as a percentage of the total liability on the P35 for the year, depending on the number of late payments in the surcharge period (using the Table below).
- The surcharge period starts on the date of the first default and continues until the taxpayer has had twelve months of paying on time.
New in-year PAYE model
In addition to recompense interest:
- The first late payment in a tax year would receive no penalty.
- Subsequent late payments in the tax year would attract a penalty, calculated by multiplying the total amount of money paid late in a year (excluding that for the first default) by the relevant percentage in the Table below (not yet specified) depending on the number of late payments in the year. The penalty would be charged after the year end.
- Late payments will be identified by comparing the amounts paid with the amounts due to have been paid each month, as shown on a modified end of year return.
Example: An employer should have paid £1000 each month but was late making the payment by 10 days in each of four consecutive months. The first default would be excluded. The total default would be £3000, i.e. 3 defaults after the first, and this would be multiplied by K%.
- In addition, if any payment were outstanding 6 or 12 months later, the taxpayer would be liable to an additional penalty at a defined percentage at 6 months, and at a higher defined percentage at 12 months.
The consultation period ends on 13 February 2009 and the new measures would be legislated in the 2009 Finance Bill. Implementation would be spread over several years because of the system and process changes required.
Further information:
Meeting the Obligations to File Returns and Pay Tax on Time
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