How employers can avoid PAYE penalties
Employers who make systematic but unidentified mistakes in their PAYE payments are likely to suffer expensive penalties under the HMRC rules that have applied in the last two tax years.
This is because the level of penalty is based on how often they make late payments in a tax year. HMRC may send a warning letter after each late payment, but they tend to be rather vague, and they do not send out the penalty notices until the end of the tax year, because it is not possible to establish what the total penalty is until then.
However, HMRC has said that it will change this policy, but not until Real Time Information (RTI) reporting is introduced in 2013.
RTI is HMRC’s great hope for modernising PAYE. With RTI, employers will send tax and national insurance information to HMRC at the time payments are made instead of waiting until after the end of the tax year. This will remove the need for an annual return, and hence the possibility of incurring late filing penalties. The starting and leaving process for employees will also be simplified.
HMRC is going to pilot RTI during 2012/13 and the new system will then be introduced from April 2013. In the interim, HMRC is recommending that employers ensure that information about each employee is accurate – name, date of birth, national insurance number, gender and address – and ideally that it has been verified from an official source.
The penalty for failing to file an end of year employer annual PAYE return on time can quickly mount up. It’s calculated as £100 per 50 employees for each month or part-month late. The return should be filed by 19 May following the end of the tax year. But despite continuing criticism HMRC does not issue the first penalty notice for a late return until 19 September – by which time the penalty will be for five months, a minimum of £500.
In two recent cases – involving Hok Ltd and HMD Response International – HMRC’s approach to the issuing of penalty notices has been roundly condemned. In the case involving Hok Ltd, a company with no employees, the tribunal found that only the first £100 of the penalty was payable.
The agent acting for HMD Response International honestly and genuinely believed that filing had taken place on 16 May, and given this reasonable excuse the penalty was reduced to nil.
Please get in touch if you think you need to discuss your PAYE arrangements.