Penalties: PAYE and late payment

At a glance

The penalty regime for late paid PAYE and NICs is under Schedule 56 of the 2009 Finance Act. This has applied to payments from 6th April 2010 for 2010-11 onwards.

It applies to:

• Pay-As-You-Earn including PAYE Settlement Agreements and determinations.
• National Insurance Contributions (NICs) including annual payments of Class 1A.
• Construction Industry Scheme (CIS) deductions.
• Student Loan deductions.

Penalties are charged according to whether the payment is due monthly, quarterly or annually. 

Administering penalties

Larger employers

• Should receive an automated warning letter when a payment is late. 
• A manually generated penalty notice will be issued by HMRC for second and subsequent defaults.

Smaller employers

Automatic late payment penalties did not apply until after 2014-15.

All employers

HMRC can only notify a late payment penalty charge after the end of the year when a reconciliation is made.

• HMRC has up to two years after the late payment occurred to issue a penalty letter.
• HMRC introduced a new system for Real-Time PAYE reporting (RTI) in April 2013.
• The Tax Tribunals have taken issue with the unfairness of HMRC's conduct.

Practical considerations for employers: mitigation and management

• If a payment is made even one day late, document the reason why.
• Ensure that evidence is retained to prove why a payment was late.
• Keep evidence even if only a day late.
• Make payment as soon as possible. Don't pay off earlier penalties first, you may be making the position worse.
• Consider very carefully whether to add references on payments: you may cause payments to be allocated differently later.
• Do negotiate a Time to Pay agreement as soon as you think that payments might be late.

Unfairness: HMRC often delays sending out penalty notices

• Smaller and presumably medium-sized employers may find that a whole year or longer has elapsed before they are aware that a penalty has been charged.
• The employer should contact HMRC if it considers that it has cashflow problems and needs time to pay. It should do this before it defaults.

Setting up systems

• The employer should create adequate systems to confirm when a payment is made, should it be necessary to appeal penalties. 
• Employers can set up reminders for key HMRC payment dates using standard email and calendar software.
• Where there is broadband failure, keep a record of times and dates.

Trading whilst insolvent

• Penalties, when eventually levied, may make a company balance sheet insolvent. Directors and advisers should ensure penalties are accrued in the accounts as incurred.
• Directors will need to review late payments and keep abreast of the position if there is a danger that it is close to trading insolvently, particularly if the business is experiencing cashflow problems.
• The effect of uncharged penalties or appeals lodged at the balance sheet date will need to be appraised when the accounts are signed off.

Ceasing trading or due diligence

• Care is needed to work out if any penalties are due when a business ceases trading and these will need to be factored into tax covenants and warranties when a business is bought or sold.
• There may be a substantial delay between a company ceasing in business and the time that it can be struck off the Companies Register.
• If HMRC delays raising a penalty notice it will presumably be unable to give clearance to Companies House to proceed.

Issues for advisers

• Advisers should discuss the penalty regime with clients and update engagement letters accordingly.
• Penalties apply if you are only a day late. The regime for RTI is different to the VAT penalty regime. Penalties increase according to the number of periods in which a payment is paid late.
• See PAYE late payment penalties buster for practical tips.

Reduction by HMRC

HMRC may reduce a PAYE late payment penalty because of special circumstances.

Special circumstances do not include:

1. Ability to pay.
2. The fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another.

There may well be a reasonable excuse for not having the ability to pay on time; failure of a major customer, bank lending etc.

The reference to reducing a penalty includes a reference to:

1. Staying a penalty.
2. Agreeing a compromise in relation to proceedings for a penalty.

Appeal

An employer may appeal a penalty if it has a reasonable excuse for making a late payment.

See Appeal: grounds for appeal

PAYE and NICs penalties

How they are calculated

The amount of penalty depends on whether payment is due on a monthly or quarterly basis, or annually.

1% to 4% for monthly and quarterly payments

For late monthly and quarterly payments the penalty will start at 1% of the late amount and increases in 1% steps to 4% depending on the number of defaults in a tax year.  The 4% rates applies for 10 or more defaults in a tax year after excluding the first late payment.  There is no penalty if only one payment is late in any tax year unless that payment is more than six months late.

Unless a payment is more than six months late, the amount of the penalty will depend on two things: how much is late and how many times payments are late in a tax year.

Due dates

• Monthly: 19th/(22th) of month for payments by cheque/(electronic).
• Class 1A NICs: 19th/(22th) for payments by cheque/(electronic) July following the end of the tax year.

The table below shows how the monthly and quarterly penalties will be calculated:

5% for monthly and quarterly amounts more than six months late

HMRC may charge penalties of 5% of the amount that is late on any monthly or quarterly payments:

• 5% if more than six months late.
• A further 5% if still not paid after 12 months.

5% for payments due annually or occasionally (for example Class 1A NICs and PAYE Settlement Agreements)

• HMRC may charge up to three penalties of 5% of the amount that is late, depending on the length of time that the amount is not paid in full.

Interest on late payment

• Interest is charged on late payments.

JKL Ltd employs 40 employees and its payments to HMRC amount to £34,000 per month.

Its payments for April and May 2022 were on time, June was one day late and the payments for July to December were one or two days late.

The delay was caused by a new member of staff who did not understand the significance of the different payment dates.

Penalties due

Note the additional recalculation of the first penalty. It increases each time by 1% and so seems controversial.

This appears to extend these penalties in a way not envisaged in HMRC's Powers consultation which seems unfair to those caught out.

Can a penalty be appealed?

See Appeal: grounds for appeal for a review of what the Tribunals consider is reasonable as an excuse.

Penalties are automatic and computer generated but an employer may appeal if it has a Reasonable excuse for making a late payment.

• A reasonable excuse is not defined in statute, so a case may turn on its unique circumstances.
• Lack of funds is not generally a reasonable excuse unless attributable to events outside the taxpayer's control.
• Reliance on third parties is not a reasonable excuse unless the taxpayer took reasonable steps to avoid the failure.

A taxpayer may also appeal on grounds that the penalty is disproportionate to the offence.

HMRC's powers to reduce a penalty

If HMRC think it right, because of special circumstances, they may reduce a penalty.

'Special circumstances' do not include:

1. Ability to pay.
2. The fact that a potential loss of revenue from one taxpayer is balanced by a potential over-payment by another.

The reference to reducing a penalty includes a reference to:

1. Staying a penalty.
2. Agreeing a compromise in relation to proceedings for a penalty.

The Tribunal's powers

The Tribunal may confirm or cancel a penalty, or substitute for HMRC’s decision another decision if HMRC had the power to make it.

• The Tribunal can only rely on the special circumstances provision if it thinks that HMRC’s decision in that respect was flawed. 
• The Tribunal must then consider whether HMRC acted in a way that no reasonable body of commissioners could have acted, or whether they took into account some irrelevant matter or disregarded something to which they should have given weight. 

The Tribunal should also consider whether HMRC have Erred on a point of law.

What if an employer cannot pay?

Contact HMRC's Business Payment Support Service to make a Time to Pay Agreement (TTPA).

• Penalties will not be charged once payments are within the scope of a TTPA.
• See PAYE late payment penalties buster

Legislation: Schedule 56 Finance Act 2009

PAYE payment and penalty queries (or technical and investigation support), please contact the Virtual Tax Partner  support team.