Employment taxes: payroll penalties

25 November 2018

This article was featured in the December 2018 / January 2019 issue of the magazine

Justine Riccomini ChFCIPP, head of taxation (Scottish Taxes, Employment and ICAS Tax Community) for ICAS, discusses the sanctions employers face

The term ‘employment taxes’ cover many different areas: pay as you earn (PAYE), benefits in kind, and National Insurance contributions (NICs) (as well as the construction industry scheme). The national minimum/living wage (NM/LW) regulations complicate matters further, because whilst they are not tax-based they are administered and enforced by HM Revenue & Customs (HMRC). 

Although the UK’s income tax penalty regime covers many different penalties, these are the three broad areas: 

  • penalties for failing to meet a time-bound obligation, such as submitting a return or making a payment by a specified deadline 

  • penalties for failing to meet a regulatory obligation such as notifying taxable status

  • behavioural-based penalties for submitting inaccurate returns and documents.

    

...UK’s income tax penalty regime covers many different penalties...

 

RTI and PAYE

Penalties can be charged when a real time information (RTI) full payment submission (FPS) was not sent in on time, or HMRC was expecting a different number of FPS returns, or the employer payment summary (EPS) was not submitted even where there are no employees. 

Penalties for late submissions, which are set out in section 106 and schedule 55 to Finance Act 2009 (FA 2009), are based on the number of employees. The first failure is overlooked as is the late receipt (as long as within thirty days) of the first FPS by a new employer. Second and subsequent failures are penalised as shown in Table A.

The due dates for payments of PAYE income tax and NICs are 19th of the month or 22nd of the month (if paying electronically) following the tax month when the salary or wages payment was made to the employees.

Failure to pay PAYE and NICs on time incurs penalties under the provisions set out in section 107 and schedule 56 to FA 2009, as shown in Table B. 

When payment issues arise, it may be possible to enter into an agreement with HMRC to defer the payment of taxes, and without being liable to certain surcharges or penalties that would otherwise be due because of late payment. This is usually referred to as a ‘time to pay (TTP) agreement – and the conditions attaching to it are that, first, it must be entered into before the due date and, second, it needs HMRC’s agreement in writing. Generally, a TTP is seen by HMRC as a temporary measure and, needless to say, if there is a TTP in place but the payment terms are not kept to, the penalties come back into charge (section 108, FA 2009). 

Failure to submit mandatory e-filing returns of any kind are punishable with a penalty in accordance with the Income Tax (Pay As You Earn) Regulations 2003. 

 

...Penalties for failing to pay the NM/LW are extremely punitive ...

 

Benefits in kind

The penalty for not submitting P11D returns of expenses payments and benefits to HMRC by the 6-July deadline following the tax year in which the benefits were received is £300 initially per P11D followed by a continuing failure penalty of up to £60 per day, under section 98(1) of the Taxes Management Act 1970.

Class 1A NICs which become due on the benefits are payable by 19 July (22 July for electronic payment) following the 6 July deadline. If this is not paid, penalties and interest can become payable, starting with a penalty of £100 per fifty employees or part thereof for the first twelve months. This penalty is capped at the value of class 1A NICs outstanding. If the return is still outstanding more than twelve months after it initially became due, a further penalty not exceeding the total class 1A NICs becomes due. A surcharge of five percent of the NICs due can be applied after 31 days, six months and twelve months respectively under regulation 67B of the Social Security (Contributions) Regulations 2001.

If an employer enters into a PAYE settlement agreement (PSA), then the figure payable is normally computed and agreed over the summer following the tax year in question and any grossed-up PAYE and class 1B NICs settled by the employer by 19 October (22nd for electronic payment). Penalties for not complying are the same as the other PAYE penalties, and for the class 1B NICs the five percent surcharge as described in the previous paragraph can be imposed.

 

Appealing penalties

Penalties for both late filing and late payment are automatic and HMRC has no discretion over their application or amount. If an employer wishes to appeal the penalty, this will need to be based on a ‘reasonable excuse’ or, less frequently, ‘special circumstances’. Reasonable excuse is well-established in UK tax law and has been considered and tested in many tax cases before the UK tax tribunals. Points to bear in mind include:

  • There is no statutory definition for ‘reasonable excuse’, which is a matter to be considered in the light of all the circumstances of the particular case. What is reasonable may differ from person to person depending on the particular circumstances and abilities. 

  •  A shortage of funds will not be accepted as a reasonable excuse, unless this is attributable to events outside the person’s control, such as waiting for payment from another party where for reasons that could not have been foreseen, such as insolvency, this is not possible.

  • Ignorance of the law does not constitute a reasonable excuse.

  • Finally, if the ‘reasonable excuse’ comes to an end, then the failure or obstruction needs to be rectified without unreasonable delay.

 

Employer compliance reviews

If during an employer compliance review HMRC determines that a return under RTI or another return such as P11D or P11D(b) is inaccurate, the penalties which apply are based on the potential loss of revenue to the Exchequer and are governed by the provisions set down in schedule 24 to the Finance Act 2007 as follows:

  • careless inaccuracy – 30%

  • deliberate but not concealed inaccuracy – 70%

  • deliberate and concealed – 100%.

It is possible to mitigate these penalties by way of either a prompted or unprompted disclosure: prompted – 15%, 35% and 50%; unprompted – 0%, 20% and 30%.

Where there are accusations of mistakes, carelessness, or deliberate default the employer may be better to appoint an agent who specialises in this area to negotiate on their behalf with HMRC. 

 

National minimum wage

Penalties for failing to pay the NM/LW are extremely punitive at 200% of any arrears owed to the worker and a maximum penalty of £20,000 per worker. Note that any penalty is reduced by 50% if the unpaid wages and the penalty are both paid within fourteen days. An employer’s brand and reputation can also suffer if there is a NM/LW breach as HMRC ‘names and shames’ employers that are penalised. 

Under section 19C of the National Minimum Wage Act 1998, the employer may appeal to an employment tribunal against a notice of underpayment on one or more of the following grounds:

  • that at the date set in the notice, no arrears were owing (i.e. the employer had not breached minimum wage legislation in respect of the worker(s) named in the notice). A successful appeal will lead to the notice being rescinded

  • that any requirement in the notice to pay a sum to a worker was incorrect, either because no sum was due to a particular worker or because the amount specified was incorrect. A successful appeal will lead to the notice being rectified

  • that the amount of the penalty specified in the notice is incorrect. A successful appeal will lead to the notice being rectified.

HMRC, which administers the NM/LW on behalf of the Department for Business, Energy and Industrial Strategy (BEIS), has set out the most common NM/LW errors in the December 2016 edition of its Employer Bulletin. These reasons remain the same today, and payroll professionals should be vigilant of the following:

  • not paying the right rate (e.g. missing an employee’s birthday increase)

  • making deductions from wages which reduces the employee’s pay below the correct NM/LW rate

  • including top ups to pay that do not qualify for NM/LW

  • failure to classify workers correctly, perhaps by treating them as self-employed or volunteers

  • failure to include all the time a worker is working (e.g. when shutting up shop, waiting to clear security or travelling between customer appointments).

Perhaps the most difficult one of these to flag to an employer is classification of workers; for example, payroll professionals will not necessarily be aware that an employer has decided to treat someone as self-employed. Practitioners should have at least one ‘due diligence’ conversation with the employer each year (but preferably more often than that) to ensure that they have covered this point – especially in small and growing private businesses and charities, but also in public sector entities.

 

Conclusion

It’s a jungle out there! So, great care is needed with payroll compliance as failure to do so can be costly in terms of penalties. 

 

Table A: Penalties for late submission of FPSs

1–9 employees

£100

10–49 employees

£200

50–249 employees

£300

250+ employees

£400

Failure continues for more than three months

5% of the tax due

Table B: Penalties for late payment

Number of late payments in year

Penalty applied to amounts paid late

1st default

Disregarded – late payment warning letter issued

2nd, 3rd, 4th defaults

1%

5th, 6th, 7th defaults

2%

8th, 9th,10th defaults

3%

11th,12th late payments

4%

Any amount paid six months late

5%

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