Employers beware the PAYE penalty trap

8 February 2010

Email article : Print article : More articles like this

For any employer, deduction of tax and national insurance contributions at source under PAYE is a fact of life. But HMRC are planning to crack down on those that hang on to this money for as long as possible by introducing a penalty system from April 2010.

Employees are paid at the month end and PAYE (including income tax, employees' Class 1 NICs, employers NICs, Construction Industry Scheme and Student Loan deductions) must be paid to HMRC by the 19th of the following month, or the 22nd if payments are made electronically. The only concession for small employers is to allow quarterly payments where the average monthly PAYE payments are less than £1,500.

Employers generally perform this tasky accurately and on time. However, if HMRC are to be believed, a minority take advantage of the present system, which allows employers to drag their heels in handing over PAYE and suffer no disadvantage, unless they are still in arrears at the end of the fiscal year.

But all that is set to change. From April 2010, a new system of penalties for late payment of PAYE will mean that employers can no longer take a relaxed attitude to PAYE due dates as payments must be made on time in order to avoid incurring a penalty.

The aim is to discourage those who are either habitual late-payers or who take six months or more to settle their liabilities. So, whereas one slip in a tax year will incur no penalty, two, three or four late payments will result in a penalty of 1% of the late paid sum and employers who are late 11 months out of 12 will be charged 4% of the amount overdue.

Additionally, any one payment made more than six months late will incur a 5% penalty, with a further 5% being charged if the payment is still outstanding after twelve months. The full tariff can be found here.

Under the new system, penalty notices will not be handed out automatically by a computer but dealt with individually on a risk basis. Nevertheless, the tariff concept that they are proposing to use shows little sign of flexibility.

The only cases where it seems that the penalty regime will not be used are where a Time to Pay arrangement is already in place with HMRC or where there is a "reasonable excuse".

The idea of a reasonable excuse is already familiar from the VAT penalty regime and it is clear that something fairly drastic has to have happened in order for it to cover a late payment.

Reasonable excuses are likely to be "unusual, unforeseeable and unpreventable", therefore lack of funds will not a reasonable excuse. So, making sure that your business has funds in place to meet its PAYE liabilities at the right time becomes more important than ever.

Along with the loss of flexibility over payments within a tax year will go tolerance of human error. The penalty regime requires no intention to delay payments. No matter that the employer underpaid as a result of faulty information and corrected the situation as soon as the position was clarified. The error counts as a "first strike" and the next underpayment will result in a penalty in the absence of a reasonable excuse.

Overall, it seems that the employers' responsibility for collecting a significant slice of the Exchequer's revenues is about to get a great deal more onerous. There would be an outcry if NICs or the income tax rate went up by 5%, yet there has been little reaction to this new regime which puts yet another burden on overstretched employers. Although there will be an opportunity to appeal any penalties imposed, in practice the chances of success are slim.

Prevention is better than a cure, so payroll departments must be given the right information in time to process it at the month end and pay the correct amount of tax. If it looks as though cash flow will prevent your business from settling the PAYE due at the right time, the message is to communicate it to HMRC in advance and try to negotiate a Time to Pay arrangement. If you're in any doubt about your procedures, now is a good time to seek help.

About the author

This article was contributed by Clare Munro is a partner at Haslers Chartered Accountants and a member of the UK200 Tax Panel. She advises on all tax related matters including investigations and has been in practice since 1982, serving a vast range of clients, from individuals to FTSE100 companies Clare.Munro@Haslers.com

UK 200Group is an association of separate and independently owned and managed accountancy and lawyer firms, and as such each has no responsibility or liability for the acts or omissions of other members. UK200Group does not provide client services and it does not accept responsibility or liability for the acts or omissions of its members. www.uk200group.co.uk

Employers beware the PAYE penalty trap

Related articles