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Employer and Contractor Compliance – New penalty regime for late payments
Wednesday, December 23rd, 2009
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To advise employers of the implications of the new penalty rules for late payments, HMRC has published basic guidance notes and provided a series of “frequently asked questions”.
Although it is obvious how HMRC will be able to identify late payments, the guidance notes and FAQs do no make clear how payments that are not made in full will be identified. At present, it is only necessary for an employer to ensure that the total payments for the year are made by 19 April following the end of the tax year and there is no specific way to tell if a monthly or quarterly payment is less than it should be.
During the consultation process on the new penalties, it was suggested that form P35 could be used by requiring employers to list the amounts that were due throughout the year. HMRC subsequently stated that that approach would not be used, at least initially. It is understood that the P35 ideas was dropped, not because it would impose an additional reporting burden but because HMRC systems could not currently handle the change.
We asked HMRC to explain how short payments will be identified and received the following response:
“You are correct that the original proposal for an additional section on the P35 was dropped. Rather than burdening all employers with an additional information requirement, we decided to adopt a method which targeted those cases where it appears from the information we hold that there may have been non-compliance.
The system we are developing will help us to bring together all the relevant information and to use it to target those cases where there appears to be a penalty liability. Potential ‘underpayers’ may well form part of this group and we may inspect employers wages records as part of this targeted approach.”
One likely indicator of an “underpayer” would be regular payments throughout the tax year but a large final balancing payment at the year end.
We also asked HMRC to comment on what the situation would be if, during a compliance check, it were found that full payments have not been remitted each month or quarter? If there were a clear breach, it would be understandable for HMRC to impose penalties. But, where would the line be drawn? For example, if an employer had to make one or more manual payments (outside of the payroll) in a month, with the result that the full tax and NICs were not sent in that month but in the next, would that be grounds for a penalty? How reasonable will HMRC be in applying these powers? HMRC replied:
“Employers may be liable to the late payment penalties if they fail to pay the correct amount on time on one or more occasion. Each failure, apart from the first (which may still attract 5% penalties if paid more than 6 months late) may attract a default penalty (and possibly continuing 5% penalties) unless the employer can demonstrate that they had a reasonable excuse for the failure.
The outcome in any particular case will therefore depend on whether there was a reasonable excuse for the failure – and whether there is a reasonable excuse will depend on the facts of the case. FAQ 25 outlines our views on what might constitute a reasonable excuse.”
Other reports from meetings with HMRC also indicate that,
- HMRC accepts that there are many common reasons why payments may vary from month to month and employers will not be penalised for small underpayments, and
- where there are significant changes in the pattern of payments made to HMRC during a tax year, HMRC will investigate why the situation has occurred before penalties are applied.
Further information
Penalties for late payment of employer and contractor PAYE
PAYE – penalties for late payment – Frequently asked questions
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