Late Filing Penalties

From 6 October 2014 the HMRC computer automatically issues you with a penalty if you submit your full payment submission (FPS) under RTI “late”, or don’t submit it at all for a month in which you paid your employees.

So what makes the FPS “late”? HMRC say the FPS must be submitted on or before the day the employer pays the employees (the “payment date”). But is that the day the funds leave the employer’s bank account or the day the employee receives the money?

In fact the “payment date” for RTI purposes is neither of these dates. It is the date contractually agreed between the employer and the employee to be the date on which the employee is to be paid. If the funds happen to be passed to the employee on an earlier or later date, perhaps due to a bank holiday, that doesn’t change the “payment date”. This is explained in HMRC’s RTI guidance on non-banking days.

So whatever the payment date is in your employee’s contract (verbal or written), that is the date that you should enter in the payroll software as the regular payment date. As long as the FPS is submitted before that regular payment date, you should be able to avoid any late filing penalty.

In fact you will be allowed one late filing per tax year without incurring a penalty. The HMRC computer will warn you that you have submitted your FPS late by sending an electronic notice sent through HMRC’s PAYE online service. You may have already received some of these electronic warning messages, but at present no penalties have been issued. If you receive any more late filing warnings do let us know as the late filing penalties can be up to £400 per month for large payrolls.

Understanding the CIS

If you are a contractor in the construction industry it is essential that you deduct the right amount of Construction Industry Scheme (CIS) tax from payments you make to subcontractors.

A common misunderstanding about the CIS is that deductions of CIS tax only have to be made from labour costs. This is not the case, but it may work out like that in practice.

HMRC’s instructions are clear, the contractor must deduct the following cost items as listed on the subcontractor’s invoice before applying the appropriate rate of CIS tax (20% or 30%) to the net amount:

  • VAT charged;
  • CITB levy paid;
  • materials;
  • consumable stores;
  • fuel used – except for travelling;
  • plant hire; and
  • manufacturing or prefabricating materials.

If the contractor does not deduct the right amount of CIS tax they remain liable for that tax to HMRC, unless the contractor can persuade HMRC to demand the CIS tax directly from the subcontractor.

In a recent case the judge was very critical of the company directors and internal accountant for not taking the trouble to read the CIS regulations and taking care to apply them. This is a bit harsh, as the regulations are not easy to understand. However, you should at least make sure that anyone who operates the CIS within your company reads the guidance concerning CIS on the HMRC website. If you are unsure about any aspect of the CIS ask us for clarification.

Maximising statutory maternity pay

Paying statutory maternity pay (SMP) is not optional. It must be paid if your employee qualifies, but the good news is that a small business can recover 103% of the SMP paid from HMRC. A business that pays less than £45,000 of class 1 NICs in one tax year is defined as “small” for this purpose.

In a family business there may be scope for maximising the SMP payable for the first six weeks of maternity leave, and hence getting the Government to refund that SMP with a bit extra to cover the employer’s NICs due. Let’s see how this could work.

Where the employee earns at least £111 per week the employer must pay SMP at these rates for the following periods:

  • for the first 6 weeks – 90% of the employee’s average weekly earnings (AWE);
  • the remaining 33 weeks – the lower of £138.18 or 90% of their AWE.

If a bonus is paid in the crucial “relevant period” – which is used to calculate the employee’s “average weekly earnings” – the SMP payable for the first six weeks automatically increases. The remaining 33 weeks of SMP are not affected as that period is paid at a flat rate where earnings exceed £153.53 per week.

The relevant period is a period of at least 8 weeks ending on the pay day before the “qualifying week”. The qualifying week falls 15 weeks before the expected birth date, so you need to know the expected date of birth before timing the bonus payment.

Say the expectant mother normally earns £520 per week, she will receive £468 per week in gross SMP for the first six weeks. Her employer will pay class 1 NICS of £260.82 on top of this SMP and will be able to recover: £468 x 1.03% = £2,892.24. If the class 1 NICs on the SMP are covered by the employment allowance of £2,000 for the business, the employer effectively recovers £2892.24 against an SMP cost of £2808.

However, paying a large bonus won’t necessarily be tax effective; it depends on how much NICs can be covered by the employment allowance.

Say the employee receives a bonus payment of £2,000 in the relevant period, this bonus generates an employer’s NICs bill of £276, and increases her AWE and hence her SMP for the first six weeks to £675 per week. Her employer can recover £675 x 1.03% for six weeks = £4171.50.

But this is a marginal increase from £2892.24 which was recovered without the bonus; an increase of £1279.26 for paying out £2447.40 (bonus + NICs on the bonus and SMP).

There is a calculator on the GOV.UK website that can help you work out the SMP that will be due, and you can change the answers to each question to see how difference in pay will change the SMP. We can also help you crunch the numbers.

Real time information (RTI) penalty notices

As an employer you may have received an RTI penalty warning letter accusing you of not submitting all of the RTI returns required for 2013/14. However, that letter may be incorrect.

HMRC has admitted that its computer has churned out inappropriate penalty warning letters to employers who have submitted employer payment summaries (EPS) during 2013/14. If you have submitted all the required RTI returns for the tax year you can ignore the warning letter, as a penalty will not be charged.

This “cry wolf” by HMRC sets a dangerous precedent, as you may be inclined to ignore further RTI penalty warning letters that could be issued later this year.

From October 2014 new penalties come into effect where the monthly full payment submission (FPS) is submitted late, or an EPS is not submitted where a FPS is not required as no payments are made. If or when those new penalties arrive you will be able to appeal against the penalty online. Note this online appeal system is not up and running yet.

From October 2014 the FPS will contain a new box that allows you to tell HMRC why the FPS is apparently late, perhaps because you are taking advantage of the concession for payrolls with nine or fewer employees.

The EPS will also be changed in October so it will relate to a particular tax month. This will avoid the need to file the EPS in the window of 20th of the current month to 19th of the following month to ensure it is applied by HMRC to the appropriate tax month.

Real time information (RTI) interest

In the past some employers would play the PAYE system, holding on to the PAYE deductions until the last payment date of the year, and then paying the balance due before interest was charged. That is no longer possible under real time information (RTI), as interest is now charged on late paid PAYE and CIS deductions on a monthly basis throughout the tax year.

The interest is applied to payments which fall due on and after 19 May 2014, which are paid late. If you check your business tax dashboard on the HMRC website, you may see interest accrued from 19th of the month. Where you pay the PAYE due electronically the payment is due by 22nd of the month. In the case of an electronic payment the interest charged from 19th to 22nd should be cancelled.

However, there is a known problem which HMRC are working to fix. If your business made no full payment submissions (FPS) for a tax month (perhaps because no wages were paid), HMRC may have estimated the PAYE due and added that estimated amount to your PAYE account. The estimated PAYE debt is called a “specified charge”. Interest accrues on the specified charge as if it was real PAYE due.

The way to get rid of a specified charge is to submit a nil Employer Payment Summary (EPS) for each of the tax months for which the specified charge has been raised for. This should also remove the interest accrued on the specified charge, but currently it doesn’t. HMRC say this interest will not be pursued, and it will be removed from the PAYE account when the software is fixed.

Auto-enrolment into workplace pension scheme

Auto-enrolment is the term for the law that requires all employers to register their employees into a qualifying workplace pension scheme. This requirement is being rolled-out to the largest employers first and will eventually apply to the smallest employers from June 2015 onwards.

For example if you have 62 to 89 employees you should have applied for auto-enrolment from 1 July 2014. Those with larger payrolls should already have auto-enrolment in place.

There are let-outs; auto-enrolment only applies to employees working in the UK who are aged 22 to state pension age, and who earn more than the personal allowance (£10,000 for 2014/15). After being enrolled in to a pension scheme, each employee has an opt-out period of one month whereby they can receive a full refund of any contributions already made. Another opt-out opportunity must be offered every three years.

Once the workplace pension scheme is running both the employee and the employer must make contributions, which will start at 1% of qualifying earnings rising to a total of 8%. Qualifying earnings consist of pensionable pay in the range £5,772 to £41,865 (for 2014/15). The employee’s employment contract will define what “pensionable pay” is.

We can help you work out what auto-enrolment may cost you, and which employees will be covered. There is a lot to think about, and if you haven’t already got a suitable pension scheme in place you will need to set one up. There are significant penalties for employers who fail to enrol employees on time, so don’t let the auto-enrolment timetable overtake you.

New RTI relief and penalties

Have you been struggling to send full payment summary (FPS) reports under RTI to HMRC on or before the days on which your employees are paid? This is particularly difficult when your workers receive irregular amounts of pay on varying dates. In such cases you may not know the amounts of wages and deductions to report until the workers have finished their shifts.

The concession for small employers with fewer than 50 employees has helped. This allows you to submit all the figures on one FPS report when you make your last payroll run in the month, but this must be no later than the end of the tax month. However, this concession ended on 5 April 2014.

The good news is that until 5 April 2016, employers with fewer than 10 workers will be able to send in the FPS covering all payments by the last pay day of the tax month. This new relaxation will only apply to existing employers. Any new PAYE scheme commencing on or after 6 April 2014, or any scheme with 10 or more employees will have to report all the wages and deductions on or before each day the employees are paid, even if that is multiple times in the month.

If you have 10 to 50 employees on your payroll, and have been using the small employer concession to cope with multiple pay dates in a month, we need to talk about how to adjust your systems from April 2014.

HMRC has experienced significant problems in reconciling amounts of PAYE due from employers, to the amounts reported under real time information (RTI). As a result some of the automatic RTI penalties which were to apply from 6 April 2014, will now apply from:

  • October 2014 for late filing of in-year RTI reports; and
  • April 2015 for late payment of in-year PAYE due.

However, interest for late paid PAYE will still apply from 6 April 2014. To keep on top of what PAYE you have paid and what HMRC thinks is due, you should view the business tax dashboard facility on the HMRC website at regular intervals. Unfortunately we cannot access the business tax dashboard on your behalf.

If you are late with filing your last RTI report (known as the final submission for the year) for 2013/14, a £100 penalty will apply. This penalty continues to mount-up at £100 per month, or part month, for each batch of 50 employees on the payroll, until the final submission is received by HMRC.

The full payment summary (FPS) for the last tax month will normally be your final submission for the tax year. This FPS should be submitted on or before the last pay day in the tax year, or by 5 April 2014 where you take advantage of the concession for small businesses.

You should not submit forms P35 or P14 for 2013/14 as the information on those forms is included on the final FPS or EPS submitted for the tax year.

If no employees are paid in the final tax month of the year you should submit an employer payment summary (EPS) as the final submission for the year. This EPS should reach HMRC by 19 April 2014. The EPS can also be used as the final submission if the last FPS for the year was not marked as the final submission for the year.

We can help you with the end of year payroll procedures if you are uncertain about what you need to do.

New real time information (RTI) messages

Real time information (RTI) is all about one-way communications with HMRC. Your payroll software sends reports (called FPS or EPS) to HMRC about the deductions made from your employees’ pay, and normally you hear nothing back.

That is starting to change. HMRC is now sending electronic messages to employers to inform them that not all is well with their RTI reports. The first messages concern late submitted FPS reports, but in future there will be messages about late paid PAYE and missing RTI reports.

It is important to get the FPS in on time as then HMRC know that the amount of PAYE paid for the month agrees with the deductions you have reported on the FPS. HMRC will not impose penalties for any late FPS submitted within 2013/14, although the final FPS for 2013/14 (which closes the tax year), can carry a penalty if that is significantly late. The messages about late FPS reports are thus just a warning from HMRC in this tax year, but may indicate there is something wrong with your systems.

From 6 April 2014 there will be automatic penalties for filing a FPS late within the tax year. ‘Late’ means it arrives with HMRC after the date on which the employees were paid. There will also be penalties for paying PAYE late.

In order to pick up these electronic messages from HMRC you need to use your payroll software, or log on to HMRC’s PAYE online services, then look for notifications. The messages are also available using the HMRC’s PAYE desktop viewer (PDV) software package. However, the PDV has just been updated so you may need to download the latest version first.

These electronic messages about FPS will be the first of many important messages concerning RTI, so you need to get used to looking for them.

EFRBS settlement

If you have used an ‘EFRBS’ (employer financed retirement benefit scheme) since 2006, you should shortly expect to receive a letter from the Taxman. This will allow you to pay tax which may have been avoided by using the ERFBS.

Various versions of EFRBS have been used by companies to make contributions into a trust for employees, for which the company has claimed a deduction against its taxable profits. The employees apparently did not suffer a taxable benefit in respect of the money held within the trust on their behalf. The Taxman is firmly of the opinion that this combination of tax allowable cost, and tax free benefit, does not legally stack-up.

He is now writing to all companies known to have used an EFRBS to offer them the choice of:

  1. giving up the tax deduction for the contribution made into the EFRBS, and any deduction claimed for professional fees connected with setting up the EFRBS; or
  2. paying PAYE and NICS due on the amounts contributed to the EFRBS.

These options relate to contributions made to an EFRBS from 6 April 2006 onwards. Where additional tax is due for an earlier year, interest will also be payable. Option a) may cost less now but in the future when the funds are paid out of the EFRBS to employees, those payments will be subject to PAYE.

We need to discuss which option, if any, will suit your company, and if you want to reject the Taxman’s offer in favour of fighting your case through the courts.

RTI penalties around the corner

This tax year (2013/14) is the first year in which the majority of employers have submitted their PAYE data using real time information (RTI). HMRC has not yet imposed penalties for late RTI submissions made within the tax year, but that is about to change.

From 6 April 2014 penalties will start to accrue after the first failure in each of these situations:

  • filing a full payment submission (FPS) after the date of payment stated in that report;
  • failure to file an employer payment summary (EPS) showing a nil payment when required; and
  • failure to pay the PAYE due in full, and on time for a particular tax month.

Note that currently there is a concession for employers with fewer than 50 employees. If all the conditions apply they can file just one FPS by the end of the tax month, irrespective of the number of times they have paid employees in that month. This concession is due to end on 5 April 2014.

The penalties for late submissions will vary according to the number of employees on the payroll. The smallest payroll with up to 9 employees will suffer a £100 penalty for every month for which the FPS is filed late. Larger payrolls will be charged £200, £300 or £400 per month for the same failure, for up to 11 months per tax year. If the employees are paid more frequently than monthly, only one fixed penalty will be applied per month.

Where no payment has been made to employees in the month HMRC expect to receive an EPS reporting a nil payment, unless the PAYE scheme has been registered as ‘annual’. If no nil EPS is received this will give rise to a penalty.

Penalties for late paid PAYE already apply, but such penalties have not been imposed so far. Late payment penalties are charged at 1% to 4% of the amount that is paid late for the tax month, with the penalty percentage increasing as the number of months of late payment mounts up in the tax year.

You will be informed that a penalty is potentially due by an automatic electronic message from HMRC. These messages are already being sent for late FPS, but they are just warnings at this stage. Other types of warning messages will commence in the next few weeks. Where a penalty is due for a tax month it will be imposed at the end of the tax quarter.

Please talk to us if you get any warning messages from HMRC, as we need to sort out why there is an apparent fault in submitting RTI reports or paying the right amount of PAYE.