From 6 April 2010, a new system of penalties for late payments of PAYE, NIC, CIS & student loan deductions will come into force. This means that any monthly payments of deductions to HM Revenue & Customs (HMRC) which are even a day late may be subject to a penalty.

The level of penalties that can be imposed varies between 1% and 4% of the late month’s due payment, depending on the number of late payments in each tax year. There is no penalty if only one payment is late.

In addition, there is a 5% penalty on any one payment if it is 6 months late, rising to 10% after a further 6 months.

Currently there are no provisions for any interest on late payments of PAYE deductions, but there are plans for this to be introduced in due course. HMRC have said that this will not happen before 6 April 2012.

This is a serious issue for many employers, particularly ones where they are encountering cash flow difficulties due to the economic climate. The HMRC guidance on the new penalties advises businesses to contact the Business Payment Support Service (BPSS) if they are having difficulty in meeting their liabilities, but in our experience this presents its own problems.

The BPSS has helped countless businesses in agreeing deferment or instalment plans for numerous taxes since its introduction 17 months ago. However, our recent experience has shown that HMRC simply do not accept that BPSS can apply to in year payments of PAYE and have rejected such proposals outright. This is despite their website in numerous places stating that PAYE is specifically included in the scheme.

In many cases, employers have now resorted to delaying their in-year payments without the sanction of BPSS approval, with the intention of paying in full at the end of the tax year, essentially because they have no other viable option. The new penalty system therefore catches these employers and puts them under even more financial pressure at the
worst possible time.

The only slight silver lining is that the first penalties will not (and indeed cannot) be raised until the tax year has finished and HMRC are able to quantify any late or insufficient payments. This will therefore be in April or May 2011. It is to be hoped that the economy has recovered by then so that these penalties will not be as business threatening as they are today. For more information about the new penalty regime, or about the Revenue’s Business Payment Support Service, please speak to James Geary on 01905 732114 or one of our other tax specialists.