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.

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’.

Employer-Financed Retirement Benefit Schemes (EFRBS) Settlement Opportunity

HMRC Offer EFRBS Settlement Opportunity

HMRC are giving employers the chance to settle open enquiries into the use of employer-financed retirement benefit schemes (EFRBS).

The settlement opportunity applies to contributions made by employers on or after 6 April 2006 and before 6 April 2011.

HMRC are of the belief that such arrangements do not work and therefore the settlements will avoid the need to take part in potentially costly litigation, thus benefiting both sides.

Firms will have until 31 December 2013 to enter into an agreement with HMRC.

Two Options Available

They will then be required to choose one of the following two options offered by HMRC:

i) No Corporation Tax deduction can be claimed on contributions to an EFRBS until the relevant benefits are paid out by the scheme, HMRC also expect PAYE and NICs will be due when they are paid out or

ii) A Corporation Tax deduction can be claimed when contributions are made to the EFRBS.  However, when those contributions are made they will be subject to PAYE and National Insurance contributions.

If an employer chooses to settle with HMRC by choosing one of these options they will have until 30 June 2014 to finalise the arrangement.

Interest & Penalties

Under option 1 interest will run from 9 months and 1 day from the end of the accounting period for which the additional amounts are due.

Under option 2 interest will run from 19 April following the end of the tax year in which allocations were made to the date the PAYE Income Tax and NIC is paid to HMRC.

HMRC have said that they will only seek penalties regarding any tax due in exceptional circumstances. However this is caveated by saying that every case will turn on its own facts.

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.

Relaxation of RTI rules for small employers

The rules on PAYE are changing with reporting of individual payments to HM Revenue and Customs becoming stricter and moving to Real Time Information (RTI) reporting.

However, it has been announced that businesses with 50 or fewer employees will be given more time to report payments to employees to HMRC in the short term.

This relaxation of the rules will apply until 5 October 2013, and means that small businesses may send the relevant PAYE reporting information to HMRC no later than the end of the tax month (e.g. 5th of each month) instead of at the time at which the payment is made to the employee.

This has come about through the Government responding to suggestions that the requirement to report to HMRC on or before the employee is paid may prove difficult for certain small businesses.

Penalty for Late payment of PAYE challenged on grounds of disproportionality

In the recent case of Franco Vargo UK Limited, the company appealed against a penalty of around £4,500 for the late payment of PAYE for numerous months in the tax year 2011/12.

Background

The appellant company had its head office in Italy. The UK branch of the company was in financial difficulty and was receiving funds from the head office. The appellant’s accountants paid the salaries and informed the company of how much PAYE was payable.

A letter was sent to the accountants saying that PAYE was due for payment, but the appellant was not aware of a PAYE liability being outstanding. Even if they had known they were not in a position to pay the liability until they received funds from Italy.

HMRC had records showing that the appellant had been contacted on several occasions and that messages had been left on an answer phone on one occasion.

Appellant’s case

Mr Earle, a director of the appellant stated that it had not been realised that a problem existed and that the problem had been left too long without any action being taken.

He informed the tribunal that the appellant had no answer phone so it would have been hard for HM Revenue & Customs to have left a message as suggested was the case. He also stated that due to its nature, the business always had someone available to answer its telephone and, as such, any attempts to contact the appellant would have been successful.

Mr Earle claimed that the amount of the penalty was disproportionate and that there was a duty of care on HMRC’s part to inform the appellant.

HMRC’s case

Mrs Orimoloye stated that HMRC had spoken to Mr Newman, the accounts manager, and that no mitigation of the penalties was possible as they had complied with the legislation.

She suggested that the appellant’s accountants should have informed the appellant of the penalty regime and that there had been history of late payments in prior years and that the appeal should be dismissed.

Decision

The tribunal found that the penalty was not disproportionate as it was imposed correctly under the legislation.

They also found that Mr Newman, the accounts manager had spoken to HMRC and that the appellant’s accountants should have notified the appellant of a liability being due. However, the tribunal were somewhat concerned that HMRC claimed to have left an answer phone message when the appellant did not possess an answer phone.

The appeal was allowed in part and the penalty in respect to the first 2 of the 11 months outstanding was cancelled as it was accepted that the appellant had no option but to wait for funds from Italy.

The following 9 months penalties were upheld on the grounds that the accounts manager had spoken to HMRC and should have taken steps to understand the situation.

Tribunal Increases Penalty: Seacourt Developments Limited (TC02918)

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.

ESC A19 – The Changing Nature of P14s and Relevant Information

Extra statutory concession A19 (ESC A19) is available to taxpayers in certain situations where tax has not been correctly collected under PAYE and as a result the taxpayer has underpaid tax.

Broadly speaking the taxpayer is not required to pay the outstanding tax liablility where it can be shown that sufficient time has passed and HMRC had ‘relevant’ information to determine that the additional tax was due.

In determining what constitutes ‘relevant’ information for the purposes of ESC A19, HMRC guidance states that the end of year reconcilliations submitted by employers for each employee in a tax year (known as form P14), do not constitute relevant information.

However a recent freedom of information request by Keith Gordon (a barrister from Atlas Chambers) has discovered that HMRC’s guidance prior to well publicised errors with it’s system, found that P14’s were treated as relevant information (ESCapology, Taxation Issue 4376).

Despite the current assertion that P14s are not relevant information, Eaves & Co were recently able to successfully argue that a P14 did constitute relevant information which resulted in our client successfully having ESC A19 applied.

From speaking to other advisors this success may however be a one off as HMRC seem to be denying P14s as relevant information in most instances where ESC A19 is being sought.

The consulation for the revision of the conditions of ESC A19 has now closed with Eaves & Co submitting a response, in particular making a point for P14s to be included as relevant information. However we will wait and see the outcomes of this consultation and provide an update in due course.