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.
The recent tribunal case of Seacourt Developments Limited v HMRC involved appeals against a number of determinations by HMRC in respect of PAYE, national insurance contributions (NICs) and Construction Industry Scheme (CIS) deductions.
Seacourt had previously stated that it only had seven employees via its P35 and no subcontractors were detailed in its CIS returns for 2005/06. In August 2008 the company’s new auditors submitted a revised schedule showing “workers” for 2005/06 as being 176, however no additional detail could be provided on their status as Seacourt did not provide it.
HMRC subsequently issued determinations for the 169 additional “workers” from 2005/06 -2007/08 on the advice of the company’s accountants (Seacourt failed to arrange a meeting with their accountants to discuss the issues). HMRC made an estimate as to which “workers” should have been dealt with under PAYE and CIS, with the total amount of PAYE and NIC due being £758,124.
In addition to the tax due HMRC also issued penalty notices. The maximum amount that could be charged was 100% of the tax due; however HMRC mitigated the penalty by reducing it by 10% for disclosure (max 20%), 20% for co-operation (max 40%) and 20% for seriousness (max 40%). The result being that the penalty was reduced to 50% of the tax due.
Seacourt appealed against the penalty but the judge ruled in HMRC’s favour. However, perhaps most surprisingly the tribunal ordered that the penalty be increased to 95% of the tax found to be due, bringing the total penalty to £720,217.80 (previously £379,060).
The penalty was increased on the basis that Seacourt had failed to co-operate and the offence was serious in nature, and therefore the discounts previously afforded by HMRC were removed. The tribunal also felt the disclosure was not of sufficient quality to warrant a 10% reduction and reduced it to 5%. As a result the maximum penalty was only reduced by 5%.
The overall outcome of the case is not surprising given the facts, however the fact that the tribunal ordered the penalty to be increased is. This could have an impact on HMRC’s penalty mitigation criteria in the future and also make taxpayers think twice before appealing an already reduced penalty.