PAYE penalties – another trap for employers

For any business that hires people, deduction of tax and national insurance contributions at source under PAYE is a fact of commercial life. Employees are paid at the month end, and PAYE must be paid over to HM Revenue & Customs 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.

The system has the effect of delegating tax collection to employers in such a way that most employees do not need to file a tax return. Employers generally discharge that responsibility accurately and on time. However, if the Revenue is to be believed, a sizeable minority take advantage of the fact that the present system allows employers to drag their heels in handing over the PAYE, and those employers suffer no disadvantage unless they are still in arrears at the end of the fiscal year.

All that is set to change as the Government introduces a new system of penalties for late payment of PAYE with effect from the 2010-11 tax year. The new rules apply not just to payments of income tax and employees’ class 1 NICs collected under PAYE, but also to employers’ NICs, Construction Industry Scheme and student loan deductions. The result is that, whereas in the past, employers could take a relaxed attitude to PAYE due dates, from April 2010, payments must be made on time in order to avoid incurring a penalty.

Two strikes and you're out

The aim of the new regime 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 12 months. The full tariff is included in a list of 42 “frequently asked questions” on HMRC’s website (in the “What’s new” section).

The Revenue point out that, under the new system, penalty notices will not be handed out automatically by a computer but will be dealt with by individual offices 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 to advisers and quite a few businesses 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.

The Revenue say that reasonable excuses are likely to be unusual, unforeseeable and unpreventable: specifically lack of funds is not a reasonable excuse, and so making sure that your business has funds in place to meet its PAYE liabilities at the right time becomes more important than ever.

No room for error

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 regime is so rigid that the chances of success must be slim.

Prevention is a better option than cure, which means that 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 (Business Support Unit on 0845 302 1435) and try to negotiate a time to pay arrangement. If you are in any doubt about your procedures, now would be a good time to seek help.