Wednesday, 6 October 2010

Taxman introduces penalties on all employers for paying PAYE late

What's new:
From May 2010, employers are subject to penalties for not paying their PAYE bill on time, either monthly, quarterly or annually. The late payment penalties apply to all employers, regardless of size. 'Late' in this context means the payment reaches the Tax Office after the 19th of each month, (or 22nd when paying electronically).

Until now the Taxman did not impose penalties or interest on small employers if all the payroll deductions for the year reached him by 19th April (or 22nd) after the end of the tax year. Large employers (those with more than 250 employees) have been subject to surcharges for late payment for some years, as they have been obliged to pay over all deductions electronically.Those surcharges for large employers have been scrapped and all employers are now subject to the same penalties. However, small employers do not have to pay over their deductions electronically.

For penalties relating to late payments due in the current tax year 2010/11, HMRC will send late payment penalty charges after the end of the tax year (5/4/11). HMRC can issue a penalty letter up to two years after the late payment occurred. It is your responsibility to make sure that you pay PAYE on time. HMRC does not issue reminder letters.

How penalties operate: 
The penalty will be based on the total amount of deductions paid late for the tax year and will be calculated based on the number of times payments are late in a tax year as follows ...

- Late once – no penalty (as long as the payment is less than 6 months late)
- Late 2 to 4 times – 1% penalty
- Late 5 to 7 times – 2% penalty
- Late 8 to 10 times – 3% penalty
- Late 11 or more times – 4% penalty

If the employer has still not paid an amount in full after six months, a penalty of 5% may be due. A further penalty of 5% may be charged if payment is still outstanding after 12 months. Please note that these penalties are in addition to the penalties fro monthly and quarterly payments described above and they apply even where only one payment in the tax year is late!

(Comment: The taxman is closing down on all employers, going for their monies on time! However, it remains to be seen how the system will be implemented in practice, as the taxman doesn't know until after the end of the tax year - when P35 is filed - if there was any underpayment. Even if P35 shows an underpayment, surely, it is not possible to inspect PAYE records of all employers that underpaid to establish for how long the underpayment has been outstanding, so that the amount of the penalty is determined! In addition, even where P35 does not show an underpayment, it is possible that some amounts were paid late during the year and that cannot be discovered unless a PAYE inspection of the records. Bottom line is, this puts an additional responsibility on the employer's shoulders to reconcile the PAYE account every month, e.g. to ensure that late adjustments have been accounted for and so on).

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