What tax penalties apply for late paid PAYE and NIC. What should an employer consider when handling late payment issues under PAYE? How are penalties calculated and how can you appeal?

This is a freeview 'At a glance' guide.

At a glance

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


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