In Fab Cleaning Management Limited v HMRC [2016] TC04824 the First Tier Tribunal (FTT) cancelled penalties for inaccuracy in PAYE returns, agreeing that the forms must record amounts actually deducted from employees, not those which should have been deducted.
Fab Cleaning Management Ltd (Fab) was a small contract cleaning company.
- During a check into the employer’s end of year returns HMRC concluded that Fab had not deducted sufficient tax and NIC from their employees’ earnings.
- HMRC issued determinations to recover the underpayments and these were not disputed by Fab.
- HMRC also issued penalties for inaccuracies in the P35 forms.
- Fab appealed to the FTT in respect of the penalties.
Fab’s position was that the return is required to set out what amounts have been deducted from the earnings, not what should have been deducted.
HMRC contended that because Fab’s calculation of the tax and NIC due was incorrect the P35 details are inaccurate.
Legislation
Finance Act 2007, Schedule 24, Paragraph 1 allows HMRC to impose a penalty in respect of a form P35 when two conditions are satisfied.
- Condition 1 is that the document contains an inaccuracy which amounts to, or leads to
- an understatement of a liability to tax,
- a false or inflated statement of a loss, or
- a false or inflated claim to repayment of tax
- Condition 2 is that the inaccuracy was careless or deliberate.
The FTT agreed with Fab’s interpretation.
- The legislation requires employers to provide details of the payments made to employees during the year, and of “the total net tax deducted in relation to those payments”.
- The FTT noted that this could not be interpreted as if they read “the total net tax which should have been deducted in relation to those payments”.
- An employer who has recorded the amounts actually deducted cannot be said to have submitted an inaccurate return; he has provided precisely what the form asks for.
- Further, even if the P35 was inaccurate, it was not the inaccuracy that led to the loss of tax but Fab’s failure to apply the PAYE rules correctly.
The appeal was therefore allowed.
Comment
From April 2013 most employers submit payroll information to HMRC in real time and are no longer required to submit form P35. Schedule 24 penalties still apply to in year and year end submissions, see Penalties: RTI (real time information) for PAYE.
Also see Penalties: errors in returns and documents.
Case link: Fab Cleaning Management Limited v HMRC [2016] UKFTT TC04824
