Employers Beware! – PAYE Penalties

Typically, PAYE has been described as an ‘approximate’ method of collecting tax due, which remained the ultimate liability of the employee.

Recent judgements, including the case of Paringdon Sports Club, suggest more of the risk may fall on the employer.

In addition the risk may be worse with the current HMRC penchant for penalties. Many advisors will be familiar with their tendency to seek around 15% extra tax for relatively minor ‘careless’ errors. This represents increased risk for business and their advisors.

There are methods related to potentially mitigating or suspending such penalties.

To avoid embarrassment and excessive cost a prudent review may seem sensible?

Whilst most businesses operate routine PAYE relatively easily with the backing of software, experience suggests that ‘unusual’ or one off events can cause problems.

These days such errors can lead to expensive penalties, so procedures should be put in place to check the correct treatment on one off matters and if necessary take advice.

On the penalty front the case of P Steady shows that it can be worth appealing against a penalty imposition. In that recent case the taxpayer managed to get a penalty suspended where, by oversight he had put down bank interest earned in incorrect years. The Tribunal said ‘The mere fact that this is an error in a tax return does not mean that a taxpayer has been careless’. They went on to say, ‘To levy a penalty on a taxpayer who hereto has had a good compliance record over many years and then refuse to consider suspension of those penalties does not reflect well on HMRC’.

As always thinking of the correct technical position makes sense.

Osbourne Budget – IR35 Targeted Again!

I thought you may be interested in this story I found on MSN regarding IR35: Budget to close tax loophole which disguises employees as freelancers:  http://bit.ly/1RZho2f

Unfortunately, I was unable to contact Sam Lister ahead of posting this blog.  I will continue to try and get in touch with Sam at the Press Association so that I can update this blog as necessary, but my initial comments follow:

“Sources” can be saucy, especially pre-budget!

1. 90% of earners do not comply?  Is there real evidence of this?  On what basis?  As a former Inspector of Taxes and now a Chartered Accountant, I can truly say in my opinion HMRC do not (for perhaps understandable reasons) empathise with small business.

2. Depending upon the wording of this new legislation, it seems likely that state-backed organisations will be naturally risk averse and so deduct tax at source.  Sounds good?  Except then the individual earner will be having to pay taxes out of post-tax income.  How will this affect the economics related to (say) an independent worker who is expected to travel from job to job (at their own expense) whilst not being paid in the interval between jobs?

3. Will the “deemed employee” automatically get the same rights to employment protection/pension etc?  if not, how is this fairer?  If they do, will it cost more?  If not, how is the new arrangement “fairer”?

4.  The distinction between “Employed” and “Self-Employed” is complex.  It is not a clear line.  It never has been simple as case law has shown over many years.  The Chancellor may try to define it on one sheet of paper – but I fear he will fail, and/or create a mindless tick box bureaucracy which restricts business innovation.  Does a Government really wish to discriminate against independent small business?  They are not all “rich BBC Fat cats”!

5.  Why should there be different rules for “state” organisations vis a vis the private sector?  Should there not be a single law for all?

6.  Paying the “right” amount of tax under the law is surely correct.  The rules and rates though are a matter of policy and should be subject of thought and debate.

Example; An independent computer programmer with a project to help develop systems for a large corporation earning say £60,000 a year will face a marginal tax rate of 42% (income tax plus NIC).  The large corporation on the other hand would face a tax rate of 20% whether it earned £60,000, £60m or £600m.  The tax rate for the large corporation is down from 30% less than 10 years ago.  Fairness and where best to invest scarce HMRC resources are questions which may be coloured in the eye of the beholder.

The proposed rules seem to be designed to hinder certain small businesses from operating as limited companies.  Is it good policy to hamper independent commercial choice?

7.  If the independent earners did operate as a limited company, the earners would still have to pay extra tax to extract any money for their own use.  If they are genuinely independent, what is the “abuse”?

8.  If there is a genuine lack of compliance with existing rules, would it not be more efficient to employ more HMRC staff to police them, rather than adding another set of bureaucratic and complex rules?

A properly informed debate would be useful.  Anyone wishing to contribute to this debate, please leave a comment below.

Changes to Tax Benefits and Expenses Rules – Reminder

From April 2016 the rules on reporting of expenses and benefits are due to be reformed.

Previously, expenses reimbursed to employees that were wholly, exclusively and necessarily incurred by the employee in the performance of their duties were treated as an allowable expense for the employee; however the payment of the expense was treated as a benefit. Historically, such matters have required reporting on Form P11D, or to be covered in advance via a written dispensation from reporting, agreed in writing with HMRC. As there was no overall tax liability in such instances, HMRC allowed companies to agree dispensations for certain expenses which did not need to be reported in this manner.

The whole of this system is being abolished, and a new one imposed. From April 2016, it is proposed that existing dispensations will no longer be in force. Instead, where an employee is entitled to a fully matching tax deduction, employers will no longer have to apply for a dispensation, or report those expenses on form P11D. In theory this may cut back on reporting for the future, but HMRC expect there to be an underlying checking mechanism. If this is not in place and also formally verifiable then tax penalties may be imposed.

There is also a change to the way bespoke, pre-negotiated rates for expenses work. A new exemption will provide an option for employers to agree a scale rate with HMRC where they do not want to use the benchmark rates. These bespoke rates can be used for up to five years.

In order to apply for a bespoke rate, employers will need to provide HMRC with evidence, based on a sampling exercise, to demonstrate that the proposed rates are a reasonable estimate of the expenses actually incurred by the organisation’s employees.

It would certainly be prudent for employers to review any existing dispensations which are in place prior to 6 April 2016 and to consider any changes that may be required to be made to processes to ensure that expense payments are dealt with correctly from April 2016 onwards. We have prepared a questionnaire for employers to use to ascertain what steps might be needed and would be delighted to speak to you if you would like our assistance.

Compensation Payment Found to be Taxable

A recent First-Tier Tribunal raised an interesting point with regard to the rules on Termination Payments under ITEPA 2003, s.401.  These rules apply not only to compensation payments made on termination, but also a change in the duties of a person’s employment or a change in the earnings from a person’s employment, and can mean that the first £30,000 of such qualifying payments is exempt from Income Tax.

An important point to note however, is that these rules only apply where there is not already a tax charge under another heading per s.401(3).  In the case of payments made due to a change in duties this presents difficulties, as the payment could be taxed as normal employment income if the payments are found to be emoluments.

This is how the taxpayer in A Hill v HMRC (TC04480) came unstuck.  The taxpayer had his employment transferred under the Transfer of Undertakings Regulations 2006 but was not happy with the new conditions.  A compromise agreement was made under which each company paid him £15,000 in settlement of his complaints. He was required to continue working for the new company and would have to repay them both if he left within two years.

The taxpayer argued that the payments should be exempt under ITEPA 2003, s 403, however HMRC argued that they were taxable.

The First-tier Tribunal decided the payments were consideration for agreeing to accept a change in his contract of employment, however the fact he was required to continue working, and would have to repay the sums if he did not, showed they referred to his continuing employment. As such they were taxable as emoluments and not exempt.

Dividends not unlawful according to Tribunal – R Jones, J Jones v HMRC

In a recent case (R Jones, J Jones v HMRC) that initially appears surprising, the First-Tier Tribunal determined that dividends declared by a recruitment consultancy company, which subsequently went into insolvent liquidation, were not unlawful.

The company had been struggling but they were still forecast to make profits at the time dividends were declared.  Unexpectedly, the company’s invoice finance providers demanded immediate repayment of sums owed.  It appears that this was what forced the company into liquidation as they were not able to obtain the funds on demand and were unable to find alternative finance.

On appointing liquidators, the directors were advised to reclassify the sums paid as dividends as salary as there was a risk that they could be unlawful.  There was no evidence presented as to why they believed this to be the case, and the directors admitted to not fully understanding the advice given.  This reclassification took place, but the accounts and company records were not fully updated to reflect this.

The directors declared the salaries on their tax returns, but stated that tax had been deducted, which was not the case as when the payments were made, they were treated as dividends.  HMRC argued there had been a wilful failure by the business to deduct PAYE and National Insurance on these payments of salary, and were therefore seeking to recover the tax from Mr and Mrs Jones.

The directors appealed arguing that the payments had been intended as interim dividends.

The First-tier Tribunal decided that the reclassification amounted to “nothing more than a flawed analysis of the transactions which had taken place”.  The sums were clearly intended as dividends and they did not see any reason as to why they should have been unlawful.  They did acknowledge that the position may have been different if the dividends were unlawful.

The taxpayers’ appeal was therefore allowed, with the sums taxable as dividends as originally intended.

This case highlights the importance of taking correct advice, and of ensuring that dividends are declared in a lawful manner with proper records made.  The taxpayers in this case were able to get the desired outcome, but the position would likely have been resolved more easily if proper advice was taken at the time.

Whose Liability is it anyway? – Sparrey [2014] TC 03940

In a recent case the tax payer, a Mr Sparrey proved he did not need to pay HMRC for an agreed tax underpayment.  This was because as a PAYE liability, prima facie, the tax should have been accounted for by the employer.

The Tribunal found that the employer and their payment agent did not take reasonable care, so HMRC should not have directed the tax to be collected from the individual taxpayer.  The latter had depended upon his employer to calculate the tax correctly and should not be penalised for their lack of care.

This case was not directly to do with Extra Statutory Concession A19, but it was mentioned, and may be of interest to those still arguing on past liabilities.

A number of underpayments we have seen have resulted from the misapplication of PAYE procedures by the employer.  This new case emphasises that, in those circumstances, HMRC have very limited powers to transfer liability to an individual employee, away from the employer.

It may also provide food for thought on other arguments where HMRC seek recompense from individual employees which may fall more aptly on the corporate body.

Transfer of liability to an individual may occur where (Reg 72 Income Tax (PAYE) Regs 2003 – SI 2003/2682).  The employer satisfies HMRC:

a)     That they took reasonable care and

b)    That the error to fully deduct was made in good faith

Or alternatively:

That the employee received the monies knowing that the employer had wilfully failed to deduct the amounts due.

Crucially, the employee has the right of appeal against an HMRC direction, so swift action and expert advice may be required.

Reasonable excuse – It depends upon the facts!

HMRC have recently won 2 cases where the taxpayer failed to show they had ‘reasonable excuse’ for their conduct and so suffered penalties.

In Crownfield the finance director was unfortunate in that he had not appreciated that the tax climate had changed.  In earlier times he had been able to negotiate making PAYE payments late.  Thus, cash flow problems had led him to assume HMRC would accept late payment.  Indeed, he admitted he may have paid on time if he had realised there was a penalty.  The Tribunal found that this effectively precluded saying that any unexpected event was a legitimate excuse.

In EN Jones the taxpayer argued that neither her advisers nor HMRC had told her how much tax was due, so she had a reasonable excuse for not paying on time.  The Tribunal found that she had been under self-assessment for some time, so knew tax was due each January 31.  She should therefore have been more active in finding out what was due.

Conclusion

Again the case law points to the fact that taxpayers have a duty to be active and diligent in meeting their tax obligations, but implicitly reasonable excuse can go beyond ‘death, disease or disaster’.  It all depends upon the facts and being ‘reasonable’.

HMRC Criticised in Share Scheme Tribunal Case – Benedict Manning V HMRC

HMRC were criticised for their handling of a recent employee share scheme case by the tribunal judge, who noted that they had conducted their investigation “without apparently troubling to look at the scheme rules”.  The recent case is not the first time tribunal judges have been critical of HMRC’s conduct.

 

The case in question involved an employee share option scheme.  The taxpayer exercised his share options in October 2007, paying £7,636 for shares worth £111,579.  The scheme rules stated that the taxpayer should pay over the PAYE due on the exercise within 90 days, but he was not told the amount to pay by his employers until March 2008.

 

HMRC charged tax on under ITEPA 2003, s.222 on the basis that this was not within the 90 day limit imposed by the scheme rules.  The taxpayer appealed as he could not have paid the PAYE before being told the amount to pay.

 

The tribunal allowed the appeal, agreeing with the taxpayer that the date of exercise could not be the relevant date as he was not informed of the amount to pay until March 2008.

 

The tribunal judge stated that s.222 was introduced to target grossly abusive schemes and that there was nothing abusive about this scheme.  The case again shows that it often pays to challenge HMRC, especially when they are being over-zealous in their application of the law.

HMRC Knocks Cricket Club for Six

County cricket clubs were first to be targeted by HMRC enquiry. They have broadly been given a clean bill of health, although questions are still being asked about tax associated with image rights for Test players and there have been problems with the tax position of players’ agents.

HMRC though have denied it is targeting local sports clubs after a Hertfordshire cricket club was sent a tax bill of over £14,000.

Sawbridgeworth Cricket Club, a 151-year-old amateur team with an annual income of around £21,000, received the bill after the Revenue carried out an assessment in 2012.

However, after HMRC agreed a schedule of staged payments and waived penalties, the club was able to settle the bill with money raised from fund-raising events and an interest-free loan.

Community amateur sports clubs are exempt from corporation tax on profits of less than £30,00 a year, but employees such as bar staff are subject to PAYE.

An HMRC spokesperson said the department wasn’t targeting amateur clubs, but non-compliance with the PAYE regime.

“This kind of work is normal. HMRC works to ensure employers are correctly operating the payroll system, so that everyone pays the right amount of tax. We have worked with sports clubs to put things right if necessary,” the spokesman said.

The England & Wales Cricket Board (ECB) has issued guidance notes to clubs, outlining what HMRC wants, urging them to seek advice and warning they could face penalties for failing to meet PAYE and NIC payroll deductions. “Do not accept any HMRC calculations without challenge, but use the results of your review to negotiate with HMRC,” says the ECB.

Payroll Schemes and the Isle of Man Disclosure Facility

Over the years, a number of agency workers and related workers, will have entered into arrangements to try to reduce their tax burdens.  In certain cases, these may have involved Payroll Schemes run through the Isle of Man.

HMRC have been cracking down on such schemes for a number of years and have been successful in pulling them apart in a number of cases.  With the original scheme providers often no long in existence, the tax is pursued from the end users of the scheme, potentially leading to financial hardship, especially when interest and penalties are also brought into the equation.

In appropriate circumstances, the Isle of Man Disclosure Facility (MDF) could provide an option for users of such schemes to come forward and pay the tax at a reduced penalty rate.  The MDF provides a useful framework for making disclosures and would enable the taxpayer to start again with a clean slate.  In our experience, this feeling of relief is often the most significant outcome for clients from disclosing.

Eaves and Co have had extensive experience in dealing with the Liechtenstein Disclosure Facility, which operated in a similar manner, and can bring this experience to bear in assisting with a disclosure under the MDF.

For more details on the terms of the MDF, please see our earlier post here.  If you think you may be able to benefit from the MDF, please do not hesitate to contact us.