HMRC relents on multiple P35 penalties – by Rebecca Bennyworth

HMRC relents on multiple P35 penalties – by Rebecca Bennyworth

HMRC has agreed a new approach to PAYE late filing penalties with professional tax bodies to lessen the number of companies receiving notices for £400+ fines in September each year.

As part of its initiative to improve service standards, the tax department worked with the bodies to tackle some of the most aggravating issues, one of which was the way companies were hit by hefty fines out of the blue. When the new joint working group got started in autumn of 2011, the P35 penalty problem was identified as a major issue that needed early resolution. The group tabled this to be resolved before the end of March 2012.

The issue became increasingly acute when tribunals started dismissing penalty levies where the judges thought HMRC’s approach amounts to revenue-raising rather than enforcing the deadline, as documented during the past year in AccountingWEB’s Reasonable Excuse scorecard. Judge Geraint Jones effectively brought the credibility of the penalty system into question with his ruling in HOK v HMRC, a decision which has subsequently been followed by other tribunal chairs. HMRC appealed Hok, but essentially Judge Jones had ruled that the penalty system was unfair in seeking a £400 penalty at the first point. Employers were not able to rectify their mistake when the penalty was £100, which the Judge ruled unfair.

To encourage employers to comply with the 19 May PAYE filing deadline, Taxation reported a statement from HMRC and the tax bodies this morning which said it will undertake to:

  • Change the notification date for 2011/12 P35 annual returns from mid-February to mid-March 2012, so that employers will receive it much nearer to the end of the tax year.
  • Annual return reminders will be sent out from 28 April 2012, where HMRC thinks there are outstanding P35s for the year.
  • From 31 May 2012, HMRC will introduce a “P35 Interim Penalty Letter” that will go to employers within a month of the filing deadline. The letter will tell employers they have incurred a late return penalty and explain what to do to avoid it increasing.
  • Improve online guidance for submitting P35s online, including specific advice about the test-in-live service to reduce the number of employers who believe their test submission is the live submission. “The on-screen messages within the HMRC online product will also make it much clearer that even when a successful test transmission has been made, a live transmission is still required.”
  • Instruct Employer Helpline staff to tell employers about filing dates when setting up new employer schemes, to help them avoid a penalty.
  • For next year, improve the information on the P35 and the reminders to include a warning that the first penalty notice will cover four months.

“Taken together, these measures should help employers to avoid incurring unnecessary penalties and significantly reduce the number of cases where penalties in excess of £100 are charged,” HMRC said.

Today’s announcement of what this “work around” to deal with the P35 penalty issue is a real feather in the cap for the Joint Working group between the professional bodies, tax charities and senior HMRC management.

The problem arises because HMRC is unable to be absolutely certain which employers have failed to file their P35s before the final update of the files on computer which happens around mid-September. This led to many employers receiving penalty notices in September showing a penalty of £400 or £500 because the penalty accrues at a minimum rate of £100 per month from 19 May.

Employers appealed against these penalties in their hundreds in 2011, and other issues came to light in the appeal process. Many believed that they had filed successfully online because the receipt message did not make it clear that a “test” return had been filed, and therefore the employer needed to re-file in “live” mode.

The joint working group spent time trying to resolve this issue for 2011/12 returns, and a great deal of behind the scenes work has gone into coming up with a solution. Although official penalty notices will still not be issued until September, the measures announced today address the main issues and try to ensure that employers have every opportunity to sort the issue out while the penalty is still £100.

Employers and their agents have every reason to welcome the announcement, not only for resolving the issue, but as a sign of more to come from the joint service quality working group.

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