Important information for all employers

03 June 2010

A new penalty regime for late payment of Pay as You Earn (PAYE) and associated deductions is now in effect from the current tax year onwards. This will affect all businesses that collect PAYE, tax deducted from subcontractors under the Construction Industry Scheme (CIS), student loan deductions and National Insurance Contributions (NIC) to be paid over to HM Revenue & Customs (HMRC)

When will penalties be charged?

The first month’s payment to fall under the new regime was the month to 5th May 2010, which would have been due for payment by 19th May if paying by cheque (note this must be received by 19th, not sent by this date) or 22nd May if paying electronically. Please see the guidance on the HMRC website for details of payment due dates. There is also official guidance on meeting payment deadlines, for example if the due date falls on a weekend or bank holiday.

How much are the penalties?

Penalties increase the more times you are late paying in a given tax year. For one default, there is no penalty (so long as the payment is not 6 months or more late). For 2-4 defaults, the penalty is 1% of the late payments. For 5-7 defaults the penalty is 2%, 8-10 is 3% and 11 or more 4%. Please note that late payment of one –off payments such as Class 1A NIC on Benefits in Kind (such as company cars) carry an initial 5% penalty if more than 30 days overdue. Full details are on HMRC’s website.

Bear in mind that a small company employing 5 people on a salary of £20,000 each who made every monthly payment one day late would be faced with a penalty of over £1,200 without warning at the end of the tax year. Therefore it is very important to make sure that your procedures are as tight as possible.

How will penalties be notified?

Although HMRC have stated they may send you a warning letter after your first late payment, there is no requirement for them to do so or guarantee that they will. For penalties in this first year of the new penalty regime, penalties will not be notified until after the end of the tax year (and in law, HMRC can notify you up to two years later!), so you could end up with an unexpected bill if you are not careful with your payments – one day late is no different to 30 days late in the regulations!

It is worth noting that penalties charged by HMRC for PAYE or any other taxes do not qualify as a tax deductible expenses in calculating your profits for corporation tax/income tax purposes.

It is unclear at this stage whether there will be a reconciliation of monthly payments on the P35 for 2010/11 or whether the quantum of payments made will instead be checked during normal PAYE visits.

What should I do now?

It is crucial that payment is made on time to avoid penalties accruing, and electronic payment gives you greater certainty of this, along with giving you an extra 3 days to pay. There are a variety of ways to pay electronically; you can sign up for direct debit, make a normal internet or telephone banking payment, debit/credit card over the internet, and payment at the Post Office along other methods. See the HMRC website for more details on how to pay. It is also important to have evidence that you have paid on time (such as a print off from your internet banking) in case there is a dispute over payment dates with HMRC in the future.

If you have nothing to pay, it is important to notify HMRC. Please see their website for details of how to do this. If you think that you will have no liability for several months, you can notify HMRC by telephone on 0845 366 7816. You will need to quote your Accounts Office reference number.

If your normal payments are less than £1,500 per month, you can opt for quarterly payments. This means that you cannot be late with more than four PAYE payments per year!

If you have a genuine cashflow issue which is making it difficult to meet your liabilities, it is highly recommended to contact HMRC with a view to making a time to pay arrangement. This should prevent late payment penalties being due so long as you maintain the agreed payment plan.

 

As always, if you have any queries about how this legislation may affect you, or if you want help setting up a system to help you prevent late payment penalties, please get in touch with your usual contact at CRM.

 

© Copyright 2010Chapman Robinson & Moore Ltd Accountants and Tax Advisers, Oxford