PAYE - why there could be a nasty surprise in the post

Last year, a new penalty regime was introduced for late payment of PAYE bills. But because of the way that the penalties are calculated, it is only now that some firms will find out how much they have been charged.

If your business missed a PAYE deadline during the 2010/11 tax year, you could have incurred a penalty. But the nature of the scheme means that the size of that penalty will only have been calculated after the end of that tax year. There is concern, therefore, that some businesses will be hit with unexpected bills.

Why is late payment an issue now?

In April 2010, HMRC introduced new penalties for firms that fail to meet their PAYE payment deadlines. The new regime caused consternation at the time – but, because of the way that the system operates, it is only now that the charges will begin to be made.

Penalties for late payment of PAYE bills are calculated by looking at the number of occasions on which a business is late in each tax year. The higher the number of late payments (referred to as ‘defaults’), the higher the penalty.

If you are late just once during the tax year, no penalty will be due – provided that the bill is settled within six months. If more than one payment is late, however, penalties will be calculated on a sliding scale. The following penalties will be charged, as a percentage of the total amount that is due during the tax year:

1 per cent when there are between 2 and 4 late payments during the tax year
2 per cent when there are between 5 and 7 late payments during the tax year
3 per cent when there are between 8 and 10 late payments during the tax year
4 per cent when there are 11 or more late payments during the tax year.

Additional penalties may be charged in cases where monthly or quarterly amounts are more than six months overdue. In these instances, a 5 per cent charge will be made if payment is six months late, and a further 5 per cent will be levied if the bill is still not settled after 12 months. These penalties apply even if you only miss one payment deadline during the tax year.

What if I haven’t received a demand?

It is very important to note that, in the event of an investigation into your tax affairs, HMRC could conceivably look back over previous years and levy the relevant fines for late payment all in one go. This is of particular interest to those who think they have paid their PAYE late, but who are yet to receive bills for the penalties.

Broadly, you should remember that the matter is not necessarily resolved if you don’t receive a bill. You should be aware that fines could well be levied at some point in the future.

What if I can’t pay?

If you are having problems paying a PAYE bill, you should contact HMRC immediately – ideally well before the amount becomes due. You will then be able to ask the Revenue to consider offering an ‘extension’ under the Time to Pay provisions. If you contact them early, and you stick to the deal, then you should avoid penalties. On the other hand, if you only contact HMRC after the bill is already due, penalties will be charged.

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