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How to avoid penalties as income tax deadlines loom

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27th Mar 2012
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It is that time of year again when businesses have to start preparing their Employer Annual Returns which are due to HM Revenue & Customs by 19 May.

This task can never be looked upon lightly as failure to adhere to the rules could result in hefty penalties. Of course, there is a lot more than filing returns involved at the end of and after the tax year, and these duties can just as easily incur penalties if reasonable care is not taken. Penalties are charged for a variety of reasons, including incorrect returns, late returns, late PAYE payments and a failure to file online where mandatory. Employer annual returns Employers must complete and file an Employer Annual Return if they have had to maintain a form P11 or equivalent payroll deductions record for at least one employee during the tax year. A form P14 must be completed for each employee and a form P35 to summarise the end of year totals for all employees. This applies even if income tax or NICs were not due and so not deducted from the employees during the year. If an employer is required to file an Employer Annual Return, form P38A will also have to be submitted to HMRC if both of the following has applied to any employees during the year: 

  • have not had to maintain a form P11 for them during the year (and therefore have not completed a P14 for them as part of the return)
  • have not completed a form P38(S) for them during the year, to indicate that they're a student who only worked during their holidays

P38A can be filed online and HMRC recommends this method, but there is no statutory requirement to so paper filing is acceptable. Best practice dictates that you should file your P14s and P35 together to make checking any inconsistent information easier. They can be filed separately and indeed it may be more practical to do so if for example a payroll agent deals with the P14s and the employer files the P35 themselves.  You will, however, need to check that your filing method allows you to file your return in parts.  Record-keeping Copies of the P35 and P14s submitted do not need to be kept, however if HMRC requests it then an employer must be able to provide supporting evidence so it is advisable to keep a copy of the records used to prepare and file the return. Some employers do prefer to keep paper records so copies of the forms could be downloaded to record the information. No return due Employers who have a ‘live’ PAYE scheme but haven't had to complete a P11 deductions working sheet during the tax year are not required to send HMRC an Employer Annual Return. However, they must inform HMRC of this to ensure records are up-to-date and to prevent unnecessary reminders and penalty notices being issued. You can do this by letter or phone but if you notify online then it is easier, cheaper and you will receive confirmation. This time last year, HMRC published two new forms on the web for employers and agents to use to inform them of no return. They will confirm by email when notification is received and then send a further email when records have been updated. The forms will not be processed until after 5 April so employers may not receive the second email quickly but there is no need to contact HMRC. If you use this facility, please check carefully that the PAYE employer reference is correct as it makes it extremely difficult for HMRC to process a claim without having to contact the employer. If you are in any doubt about the reference it will be shown on the P30B payment booklet or on the electronic PAYE reminders which HMRC send out each year.   Correcting errors If an amendment needs to be made to the return after it has been sent to HMRC, they must be notified in writing and an explanation must be given about why the return needs to be amended. New versions of the forms will need to be sent, but it is important to remember that it is only the difference recorded between the original figure filed and what the new figure should be. For example, if £300 was entered but it should have been £3,000, the new figure would be +£2,700. If it should have been £30, then it would -£270. A new P35 must also be sent if any P14s are amended, even if the actual figures remain the same. Care must be taken to file returns in plenty of time to allow for any corrections that may have to be made to ensure the correct return will still meet the 19 May deadline. Late returns There are also penalties for late filing but furthermore, care must be taken to ensure the returns are correct as if the file is rejected and not submitted correctly by the deadline, again penalties will be incurred. A return can be checked against HMRC's ‘quality standard’ to make sure the information provided is in the correct format and many commercial payroll software packages will allow a test submission. HMRC also provides a list of common errors to avoid.  A return of benefits is also required every year on form P9D or P11D if an employer has provided employees with any non-cash benefits and expenses. This is due by 6 July along with the employer declaration and Class 1A NICs return, form P11D(b). HMRC does not currently issue penalties for late filing of P11D(b) returns provided they are received by 19 July following the end of the tax year; however they announced last December that they will withdraw this practice from 31 March 2013. So P11D(b) returns filed after this date must be made by 6 July following the end of the tax year in order to avoid penalties. Failure to file online Almost all employers are now required to send form P35 and forms P14, to HMRC online. There are some exceptions to the rule where certain groups have the option of filing their return either online or on paper. They include employers operating HMRC’s simplified deductions scheme for domestic employees, exemption on religious grounds and those who employ someone to provide care or support services at or from their home. And there are also certain groups that must file on paper. Employers and certain employees who have special arrangements with HMRC for the direct collection of PAYE tax and/or National Insurance and employers whose business is a limited company and the only information you’re submitting is an entry in Box 28 ('CIS deductions suffered') of form P35 relating to payments received for work in the construction industry. If the return sent to HMRC, or part of the return is on paper or magnetic media, when the requirement is to file online, there may be a penalty charge for using the incorrect method to file. The penalty applies regardless of whether the return was filed on time or late and it will still apply even if attempts are made to put things right by filing the return again online.  There are also certain in-year forms to consider which almost all employers must file online, namely: 

  • P45 Part 1 - when an employee leaves
  • P45 Part 3 - when a new employee starts
  • P46 - when a new employee starts, but has no P45 from their previous employer
  • P46 (Pen) - details of a new pension or annuity that an employer starts to pay
  • P46 (Expat) - for certain employees seconded to work in the UK

 The penalty for using the incorrect filing method or not filing online when mandatory can be anything from £100 to £3,000 depending on the number of forms that should have been filed. For large businesses, this could be very costly if an error goes undetected on a form and it is duplicated on all forms. For example, filing between 6 and 49 P14s incorrectly would generate a penalty of £300 whereas if it were 900 to 999 that were filed incorrectly it would be £2,700.  Appeals If you don't agree with a penalty notice that you receive from HMRC, you have the right to appeal against it. There have in fact been several cases going through the courts over recent months where appeals against the penalties imposed have been upheld. The common denominator in these cases is that the penalties were not sent out until September and had by that point accumulated several months’ worth of penalties after the 19 May deadline for submitting a return. The argument is that if HMRC sent penalties straight after the deadline date then it would alert the employer to send in their return and they would receive a smaller penalty. In one case (HOK Ltd. V HMRC), the judge actually accused HMRC of using its penalty regime as a cash generator. HMRC really has come under fire with these cases and is insisting that the penalties are not designed to be a reminder to employers that they haven’t filed on time; they are there to encourage compliance. HMRC confirmed at the beginning of the year that it will be appealing against the decision in the HOK case. Real Time Information On a final note, we can’t possibly talk about the end of year process without mentioning that, from April 2013 when RTI starts to become mandatory for employers, the end of year process will look completely different. Employers will be sending the information normally sent at the end of the tax year to HMRC at the same time or before they pay their employees, thereby making a high proportion of the current process redundant. But for now, until October 2013 when all employers will be required by statute to use RTI, it is business as usual.  Diana Bruce is a senior policy liaison officer for the Chartered Institute of Payroll Professionals. This article was first carried by our sister site, www.AccountingWeb.co.uk.

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