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Beating the ticking time bomb

10 May 2011 / Rachael Down
Issue: 4303 / Categories: Comment & Analysis , tax basics , Admin , Business , Employees , Income Tax
RACHAEL DOWN explains why it pays for employers to file returns promptly


  • Employer annual return deadlines.
  • HMRC crackdown on penalties.
  • Where others went wrong.
  • How to file it right.

So, it is spring. The days are getting longer and we are beginning to anticipate the summer holidays.

On the other hand, we are experiencing temperamental temperatures, blinded by bare pasty legs, and for some employers, lulled into the false sense of security that the yearly tax return filings are a thing of months past.

Yet, if you happen to be one of those employers who has been bathing in sunlight and neglecting your annual return, it is time to retreat from the heat and step into the shade.

Darling buds of May

An important date for employers and accountants alike is 19 May 2011. This is the deadline for the online filing of the employer annual return, which comprises forms P11, P14, and P35 if the employer was required to maintain a payroll record for at least one employee during the previous tax year.

This is compulsory by law, regardless of whether or not any deductions of PAYE or National Insurance were made from the employees’ pay.

Any employer who does not file by 19 May is likely to face a penalty of £100 for every 50 employees for each month (or part month) that the return is outstanding. (For more details see Late filing fees and Late payment penalties.)

It may seem simple enough, but to avoid penalties, it is very important that employers allow enough time to file before the deadline.

As we have all recently read, HMRC are planning to crack down on late payment, particularly by using penalties, and if the huge pile of First-tier Tribunal cases on my desk are anything to go by, unless the employer is at death’s door, late filing penalties are difficult to escape.

Length of delay on filing returns Penalty fee
One day £100
Three months £10 a day (£900 cap)
Six months £300 or 5% of tax due (whichever is greater)
One year £300 or 5% of the tax due, (whichever is greater); or 100% of tax due in serious cases


Tax cases tell all

Although not a PAYE penalty case, the First-tier Tribunal decision in J H Joy (TC1006) shows how difficult it is to fight a late filing penalty. The taxpayer appealed against fixed penalties for late filing of his personal tax return for the year ending 5 April 2005.

He contended that he had reasonable excuse as he was on sabbatical leave from his employment as a result of a mild stroke, had recently been through a divorce, and on top of that was supporting his two teenage daughters.

Despite his protestations, HMRC and the tribunal showed no mercy, holding that the taxpayer had not established on a balance of probabilities that he had reasonable excuse throughout the period in question.

The appeal was therefore dismissed and the penalty charges upheld.

This is almost standard issue among late filing appeals. Many employers seek help from an adviser when it comes to the filing of forms P35, P14 and P11. However, it is apparent from the decisions in a number of cases that this can be risky.

The delegation of return filing to an agent or an accountant does not release the employer from responsibility for meeting the deadline, and, subsequently any tardiness, independent of original fault, is likely to result in financial penalties for the employer.

Three separate cases in the past year, Wan Panelling Ltd (TC929), La Mancha Ltd (TC877) and Richfield Fashion Co Ltd (TC957), demonstrate this by presenting the same verdict: appeal dismissed and the penalties confirmed.

The legislation which catches such cases includes TMA 1970, s 90 to s 118(2). In particular, TMA 1970, s 98A provides that:

‘…any person who fails to make a return [under PAYE regulations] shall be liable to a penalty of the relevant monthly amount for each month (or part of a month) during which the failure continues.’

It is also important to note that any chance of a successful appeal lies within the qualification of TMA 1970, s 118(2), whereby if the appellant has:

‘…a reasonable excuse for not doing anything required to be done he shall be deemed not to have failed to do it unless the excuse ceased and, after the excuse ceased, he shall be deemed not to have failed to do it without unreasonable delay after the excuse has ceased.’

Unfortunately there is currently no legal definition of a reasonable excuse, and it is ‘a matter to be considered in the light of all the circumstances of the particular case’.

Fundamentally, this makes it extremely difficult to justify, and at the risk of stating the obvious, the best way to plan is: file it right, and on time.

Length of delay on tax payment Penalty fee
30 days 5% of unpaid tax at that date
Six months Further 5% of unpaid tax at that date
One year Further 5% of unpaid tax at that date


If the filing’s right

It is to be hoped that the above tax cases will serve as a timely reminder to encourage even the most recalcitrant of employers to step into action and file those forms. But how should it be done? What should the employer look out for?

What are the exceptions?

Linda Pullan, head of Payroll Alliance at LexisNexis, has provided readers with her top tips for a successful year-end filing season:

  • You can test between 100 and 1,000 P14s if you wish, but don’t forget to take the test flag off when you make your live submission.
  • Submit your returns well before 19 May to allow for any rejections and corrections.
  • Make sure all rejections have been corrected and resubmitted.
  • Send the P35 last to allow for any unforeseen adjustments.
  • If payroll does not validate the prefix letters of the National Insurance number, then check these against the list of validated letters in HMRC’s quality standard.
  • If any National Insurance numbers are missing, you must ensure that the employee’s date of birth and gender are entered on the P14 or it will be rejected. Where the employee’s date of birth is not known use the default of 01011901, but only use this at year end.
  • Where earnings in column 1A on the P14 do not equal the lower earnings limit at any time during the tax year, the National Insurance category letter must be X.
  • Monies due to HMRC after 19 or 22 April (depending on your payment arrangements) will incur interest, and large amounts owing on the P35 will attract HMRC’s attention unless it is month twelve’s payment.
  • If you have nine or fewer employees on the payroll, you can use HMRC’s software on the PAYE Basic Tools to submit your end-of-year returns.
  • You can use HMRC’s free software on their website and click ‘do it online’ if you have up to 50 employees on the payroll or you want to submit only the P35 or P14 corrections.

Mrs Pullan adds, ‘Due to the withdrawal of the extra-statutory concession B46 this year, employers will no longer have the benefit of the seven-day grace period after the deadline of 19 May to submit their returns before automatic penalties are invoked.

'In 2010, 1.2 million P14s were submitted in the seven days following 19 May, which this year would attract more than £2 million in penalties.'

The deadline for filing this year’s employer annual return forms is fast approaching, so make this a priority and avoid late filing penalties.

Happy filing!

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