Tribunal criticises HMRC for delay in issuing penalties

In a recent case, HMRC have been criticised for deliberately issuing penalties for late forms P35 (Payroll end of year forms) several months late, generating higher penalties than were necessary. A summary of the case is reported below.

This case has potentially wide ranging implications for other employers. Please do get in touch if you would like further guidance in this area.

The case (TC01286: Hok Ltd) concerned an appeal against a penalty of £400 for late filing of the 2009/10 P35. The penalty was calculated at £100 per month for four months. In October 2010 a further penalty of £100 was issued, given that the filing had taken place on the 15 October 2010 once the company had been alerted to its default.

The company argued that it thought it did not need to file the appropriate returns because its only employee had ceased employment part way through the year. It acknowledged that it was wrong and that HMRC was entitled to levy a penalty. However, the company argued that, if HMRC had notified it of its default, it would have been remedied it a far earlier time, thus avoiding ongoing penalties.

During the Tribunal HMRC stated that it runs a:

‘…structured programme to enable penalties to be issued regularly throughout the year, rather than waiting for the late return to be submitted and then issue a final penalty. These penalties, although aimed at encouraging compliance and having the effect of reminding are not designed to be reminders for the outstanding return.’

The Tribunal was amazed by this and stated that:

‘….HMRC deliberately waits until four months have gone by and does not issue the first interim penalty notice until, as in this case, September of the year of default.’

‘There can be no logical reason whatsoever for HMRC to delay sending out a penalty notice for four months so that, in effect, a minimum penalty of £500 will be levied unless the taxpayer has unilaterally realised that it has failed to undertake the necessary filing.’

‘In our judgement it would be a very simple matter for HMRC to set its computer settings so that a default or penalty notice was sent out immediately after the 19 May in any year, instead of some four months later. That might generate less penalty cash for the State, but it would be fair and conscionable as between the taxpayer and the State (acting by HMRC).’

‘As, in our judgement, HMRC has neither acted fairly nor in good conscience, in the manner described above, we do not consider that any penalty is recoverable over and above the £100 penalty for the first month unless HMRC proves (the onus being upon it) that even if such a penalty notice, which would have acted as a reminder, had been issued, the default would nonetheless have continued. It has proved no such thing.’

Changes to PAYE April 2011

Changes that will affect Employer Annual Returns and starter and leaver PAYE forms:

  • From April, employers with fewer than 50 employees must now send starter and leaver forms – P45s, P46s and similar pension information – online to HMRC.

 

  • All employers who send their Employer Annual Return to HMRC after the 19 May filing deadline will now receive a late-filing penalty. Previously, an extra-statutory concession gave employers extra time before HMRC charged a penalty, but this has been withdrawn.
  • From this year, employers will be liable to a penalty if they file their annual return on paper. Last year, no penalty was charged for employers with five or fewer employees. But these transitional arrangements have now ended.
  • HMRC will also be issuing PAYE penalties this spring for the first time in two key areas:
  1. Penalty notices will be sent out in April to employers with 50 or more employees who have not filed starter and leaver forms online to HMRC. The first penalties will apply for the three month period to 5 April 2011, with further penalties being issued on a quarterly basis.
  2. From May this year, HMRC will start sending out penalties for late payment of PAYE. Employers will be liable for a penalty if they haven’t made PAYE payments on time, and in full, from April 2010. The amount of the penalty will depend on the amounts paid late and the total number of late payments made. Penalties will be charged after the tax year-end.

Further information is available on the changes from the HMRC website.

Benefits in Kind – how to make life easier

P11D forms advise HMRC of benefits paid to employees and directors. If your business provides any sort of beneficial payment or gift of goods to employees, generally speaking most will be taxable as a benefit in kind – as if they were payments of salary etc.
To make your life easier there are some beneficial payments that you can include in a dispensation.
For example the provision of certain business travel for an employee. Items covered by a dispensation do not have to be returned on the annual P11D form.(Payments for the use of a company car or van are not included here as they are covered by separate rules.)

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Essentially you can apply to HMRC to dispense with the need to include expenses or benefits for which your employee gets a full tax deduction.
For some businesses this could take some of the pain out of this annual chore.
HMRC require that you need to have the following systems in place to qualify you for a dispensation, they are:
You must have an independent system in place for checking and authorising expenses claims. At a minimum, this means having someone other than the employee claiming the expenses check that:
the amount claimed isn’t excessive
the claim doesn’t include disallowable items
If it is not possible for you to operate an independent system for checking and authorising expenses claims, for example, because you are the sole director of your company and you have no other employees, you will only be able to obtain a dispensation if you:
ensure all expenses claims are supported by receipts for the expenditure
demonstrate that the claim relates to expenditure that can be covered by a dispensation, your receipts may be sufficient for this purpose, but if not you must retain additional information.
Once a dispensation is granted it will last indefinitely although HMRC may review from time to time to make sure the conditions under which the original grant was made still apply.
Generally speaking dispensations are granted from the application date. However HMRC may agree to apply the dispensation from the beginning of the tax year in which you apply. As we are now at the beginning of a new tax year, 2010/11, this is a good time to send in a claim for dispensation. Please call if you would like assistance to do this.

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Company Car Tax

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The taxable benefit on the use of company cars and fuel for those vehicles has increased from 6 April 2010. Take for example a petrol-powered car with CO2 emissions of 160g/km. In the tax year to 5 April 2010 you were taxed at 20% of the vehicle’s list price. From 6 April 2010 the taxable benefit for driving the same car will be 21% of its list price.

The tax position for those who have free fuel with their vehicles is even worse. Until 5 April 2010, the value of the fuel-benefit for all company cars was based on a fixed value of £16,900 multiplied by the percentage used to calculate the car benefit. So there is an increase in both the percentage and the multiplier. From 6 April 2010 the value increases to £18,000. This means the taxable benefit of having free fuel for a petrol car with emissions of 160g/km will increase from £3,380 to £3,780.

Company van drivers are also hit by the rise in the fuel benefit. Currently where free fuel is provided in a company van, and the van is used for some non-business journeys, the driver is taxed on £500 per year for the use of that fuel. From 6 April 2010 the van driver will be taxed on £550 per year for use of the fuel.

You can reduce these high tax charges by switching to a low emissions car. Where the CO2 emissions are 120g/km or less the car benefit for petrol cars is just 10% of the list price, and half that amount where CO2 emissions are 75g/km or less. We could only find one car with emissions in that bottom category: Toyota plug-in Prius, which has an official CO2 emissions rating of only 67g/km.

If your vehicle has zero emissions such as an electric car or van, there is no tax charge at all from 6 April 2010. What’s more, when your business buys a new electric vehicle it can write-off the full cost for tax purposes in the year of acquisition.

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Construction subcontractors in the firing line

CHICAGO - APRIL 23:  (L-R) Eric Gant, Rudy Vaz...HMRC have indicated that they are considering reclassifying self-employed construction workers as employed. They have actually launched a consultation process with interested parties. Reclassified workers would be taxed through the PAYE system regardl

ess of the length or brevity of each employment assignment.

HMRC are convinced that a significant number of construction workers are taxed as if self-employed even though they are providing their ser

vices to contractors effectively as if they were employees.

HMRC are calling this status issue “false self-employment”. HM

RC plan to introduce legislation to protect income tax and national insurance revenue that they feel is being lost.

The consultation document that HMRC have published assumes that these changes will happen and simply seeks input as to how such changes should be introduced.

Comments on this proposal have to be sent to HMRC before the 12 October 2009; so change, if it is coming, may not be that far away!

Medical check ups – now tax free

HMRC have now agreed that all medical check-ups provided by employers to an individual employee will be treated as tax and NIC free, even if the check-ups are not available to all employees.

This clarifies a number of changes in their approach, and informal concessions, in the last few years. The change will be acknowledged in the forthcoming Finance Bill 2009.

PAYE code changes

If your local tax office sent you a demand to pay tax you would obviously take some interest in the issue – is this change correct? When do I have to pay it?

Would you feel the same if you received a notification of change to your PAYE code number?

Your tax code is set at the level at which you pay no tax. If your tax code is 600L, you can earn up to £6,000 a year (£500 per month) tax free. If towards the end of a tax year this reduces to say 400L, your annual tax free allowance will have dropped to £4,000. Depending on the degree of reduction and the timing of the adjustment, you may suffer an immediate and perhaps significant drop in your take home pay.

What to do?

Your tax code can be revised in a downwards direction for a number of reasons. Some of the more frequent causes are set out below:

*  State Pensions – your State Pension is paid to you with no deduction for tax. Unfortunately the pension is treated as income for tax purposes and if you are employed and in receipt of the pension, HMRC will seek to collect any tax due by reducing your tax code.
* Benefits in kind – if your employer provides any form of taxable benefit, company car, health insurance etc.
* Unpaid tax from previous tax years.

An interesting situation arises if the total reduction in a tax year exceeds your basic tax free allowance. For instance if at the beginning of a tax year your tax free allowance was set at £6,500, but your untaxed State Pension for the forthcoming year was £10,000, this would result in a negative code of -350. (£6,500 – £10,000). On your Notice of Coding this would be displayed as K350. A K code means that you have no allowances to set off against your salary before tax is calculated – in fact, in the example set out above, £3,500 will be added to your taxable earnings! An increase in a K code will increase your tax deductions and reduce your take home pay.

If you receive a notification that your tax code has changed do check it out, H M Revenue & Customs have been known to make mistakes!

Tips for new employers

The basic rules for employers with new employees are important for any business.

There is no ‘Casual Labour’ exemption, if you take an employee on with intention of keeping them for just a couple of weeks on a temporary basis – the rules still apply.

If the correct PAYE and NIC is not deducted off employees, then the Employer will be held liable for any shortfall discovered.

If a new employee does not have a P45 from their previous job, then they must sign a P46 (or if they are students working only in the holidays, a P38S).

If they tick Boxes A or B – they will be on the emergency PAYE code (of 647L in 2009/10)

Employees on the basic code of 647L will pay no tax on earnings up to £125 a week, above that tax is deducted at 20%.

National Insurance Contributions are paid by the employee (11%) and employer (12.8%) on earnings above £110 per week.

If the week’s earnings are between £95.01 and £110.00 per week there are no contributions deducted but the employee is still credited with a basic National Insurance contribution. For this reason a form P11 (deduction sheet) must be maintained throughout the year for the employee.

If the employer does not pay an employee more than the NIC LEL (Lower Earnings Level) (of £95 a week in 2009/10), they do not have to prepare a P11 deductions sheet for them or include them on the year end P35. However, the employer must still have a record of wages paid to each employee in each week or month.

Service companies and the year end return

It’s time for employers to complete and file the annual PAYE return (form P35), and for the second year the form asks about the status of the company, causing some confusion and concern.

The form has these two questions which require yes or no answers:

Are you a Service Company?

–  If “yes”, have you operated the Intermediaries legislation (sometimes known as IR35) or the Managed Service Companies legislation?

Guidance on how to answer these questions is found on page 18 of the leaflet E10 (2009): Finishing the Tax year up to 5 April 2009.

If the business has no employees it will not be completing a form P35.

The introduction the guidance to section 6 says:

The first question narrows those employers who need to consider whether the second question applies.

This is a helpful statement as it leads you to believe that if your business is not a Managed Service Company (MSC) and is not affected by IR35 you can answer “no” to both the first and second questions.

However, the detailed guidance to question 1 indicates that you should answer “yes” to question 1 if the owners of the business perform any services in person for the customers of the business, and the income from that work forms at least half the total business income. Services are generally anything that is not the provision of goods.

It is clear that you should only answer “yes” to question 2 if the IR35 or MSC rules do apply to your business, all other businesses should answer “no”.

However, a “yes” to question 1 and “no” to question 2 might give the Taxman cause for concern as it will not be what he is expecting. Indeed these companies could well be contacted at some point in the future by HMRC.

Businesses who are confident they are not subject to IR35 or the MSC legislation, might therefore wish to answer “no” to both questions 1 and 2 in section 6 of part 3 to the P35 form for 2008/09.

If you are concerned that IR35 could apply to your business please contact us.

Dispensations and benefits in kind

A dispensation removes the requirement to return to HMRC on P11d forms expense payments which are not taxable. If no dispensation exists the employee then has to submit a claim that the expenses reimbursed were incurred solely in relation to the business, and are therefore not taxable.
In short a dispensation can save work for the employer, the employees and HMRC.

For example the provision of business travel for an employee is often included in a dispensation. Items covered by a dispensation do not have to be returned on the annual P11D form.(Payments for the use of a company car or van are not included here as they are covered by separate rules.)

For some businesses this could take some of the pain out of this annual chore.

HMRC require that you need to have the following systems in place to qualify you for a dispensation, they are:

You must have an independent system in place for checking and authorising expenses claims. At a minimum, this means having someone other than the employee claiming the expenses check that:

* the amount claimed isn’t excessive
* the claim doesn’t include disallowable items

If it is not possible for you to operate an independent system for checking and authorising expenses claims, for example, because you are the sole director of your company and you have no other employees, you will only be able to obtain a dispensation if you:

* ensure all expenses claims are supported by receipts for the expenditure
* demonstrate that the claim relates to expenditure that can be covered by a dispensation, your receipts may be sufficient for this purpose, but if not you must retain additional information.

Once a dispensation is granted it will last indefinitely although HMRC may review from time to time to make sure the conditions under which the original grant was made still apply.

Generally speaking dispensations are granted from the application date. However HMRC may agree to apply the dispensation from the beginning of the tax year in which you apply. It’s not too late to apply for 2008-09, call if you would like assistance to do this.