Introduction »

PAYE pain

In April 2010 HMRC introduced new style penalties for the late payment of PAYE, certain National Insurance Contributions and Construction Industry Scheme payments. The liability to a penalty is based on a totting up procedure depending on the number of defaults during a tax year.

A penalty is not levied for the first default and then rises as follows:

• up to three defaults - 1% of the total amount of those defaults
• four to six defaults - 2% of the total
• seven to nine defaults - 3% of the total and
• ten or more defaults - 4% of the total.

If any tax is unpaid six months after the penalty date, then a penalty of 5% is levied and a further 5% can be levied after 12 months.

HMRC may send a warning letter if a business does not pay on time for the first time in a tax year – then again, they may not!

Unfortunately, the penalty system is not automated and HMRC did not review the position until after the end of 2010/11. As a result it could be 18 months or more down the line before penalties are imposed in some instances.

A number of cases have now appeared through the Tribunal system and it is clear that HMRC are taking a hard line.

The major let out is if the business can show that there was a reasonable excuse for the late paid PAYE and that the PAYE was paid as soon as possible after the excuse ended. The rules specifically exclude cash flow difficulties as a reasonable excuse unless attributable to events outside of the taxpayer’s control. Recent cases have held that:

• the lack of warning from HMRC of the build up of the penalty was not a reasonable excuse
• the failure of nine specific clients leading to cash flow difficulties was a reasonable excuse, as the business was doing all that it could to collect in its debts and to renegotiate its facilities with its bankers
• a change in payment terms by the company’s only customer which caused the company severe cash flow difficulties and which took a significant period of time to resolve was a reasonable excuse.

The message is clear. If there is any problem with paying over PAYE and similar payments, contact HMRC in advance and try to negotiate time to pay. Do not wait for the bad news to appear.

Introduction »