Contractors' guide to penalties - ii) PAYE, VAT & P35
This is the second instalment of a four-part guide on the numerous returns many contractors have to file with the taxman and Companies House throughout the year and, crucially for your bottom line, the various sums in penalties you could end up forking out if you’re late with filing or payments, writes Sumit Agarwal, managing director of contractor accountants DNS Associates.
To recap, broadly-speaking, all penalties fall into three main categories:
1. Late Filing
2. Late Payment (plus interest)
3. Those for incorrect returns, which are assessed and for which you will be penalised accordingly as a result of negligence, concealment or mistake. Normally called ‘Schedule 36 Penalties,’ these are levied based on a tax enquiry.
Here in part two, the focus is on the rules and penalties that apply to Employer Annual Returns, ‘Pay As You Earn’ income tax (PAYE) and Value Added Tax. The latter, VAT, hit the headlines last week, for it is being used by the taxman as a way for him to take a closer look into an individual or company’s tax affairs, where that person or firm’s VAT is still outstanding as of February 28th 2013.
1. VAT – Filing and Penalties
If you are registered for VAT you must submit a return (usually issued on a quarterly basis) and pay any VAT outstanding within one month from the end of the VAT period printed on the return.
With VAT, ONE rule applies to every business (or individual) that is VAT-registered: you must ensure that your business is organised to deal with VAT correctly, and on time. If your company or organisation does not keep these records it may be charged a penalty of up to £3,000.
If by the due date you have not submitted the VAT return or payment has not reached HM Revenue & Customs, you will be ‘in default’. You will get a 7 day “grace” period if you file online.
Once you are “in default” you will stay “in default” for 12 months. HMRC will issue a “Surcharge Liability Notice” warning that no penalty is due yet, but you must not make any further mistakes in the next 12 months. This is known as the “Surcharge Period”.
If during the Surcharge Period you default again, a financial penalty known as the default surcharge may be incurred if there is still unpaid VAT. The surcharge imposed will be a percentage of the unpaid VAT or “potential lost income” that HMRC estimates.
The percentage imposed depends on the number of defaults incurred within the surcharge period and the level of your turnover.
Penalties for VAT non-filing and late payments – How much you’ll pay
For annual turnover below £150,000:
- First default – No surcharge. Help letter issued.
- Second default – no surcharge. Surcharge Liability notice issued.
- Third default – 2% or if liability is below £400 there is no charge
- Fourth default – 5% or if liability is below £400 there is no charge
- Fifth default – 10%
- Sixth and subsequent defaults – 15%
If turnover exceeds £150,000
- First default – No surcharge. Surcharge Liability notice issued.
- Second default – 2% or if liability is below £400 there is no charge
- Third default – 5% or if liability is below £400 there is no charge
- Fourth default – 10%
- Fifth and subsequent defaults – 15%.
Contractors, remember - if you’re VAT-registered and not up-to-date with your returns and payments, HMRC are offering a time-limited opportunity to put your affairs in order:
The VAT Outstanding Returns campaign is aimed at businesses that have ignored reminders to submit one or more pending documents. You have until February 28th 2013 to submit returns and pay outstanding VAT. Anyone that does not make use of the opportunity will, according to HMRC “receive closer attention”.
2. Payroll return and penalties for late filing
HMRC is very strict about payroll processing, and the fines and penalties in this area are as damaging to your business as all the other statutory pitfalls already spelt out. Not only that, errors with payroll can seriously damage employee–employer relationships.
If you fail to use the correct PAYE code, in law, HMRC are obliged to contact YOU, the employer, to collect the shortfall (under Regulation 72 of PAYE regulations).While it’s difficult to eliminate human error entirely, adopting good habits will help you avoid mistakes.
Penalties for PAYE non-filing and late payments – How much you’ll pay
Late payment penalties apply to all employers and contractors and apply to monthly, quarterly and annual periods of PAYE starting on or after 6 April. There are charges for late payment penalties on all PAYE amounts that are not paid in full and on time, including employee deductions and any HMRC determinations on tax or NIC.
Note that penalties can be made up of a number of items and can be simultaneously applied, so you could end up with a failure to pay penalty, plus a penalty for late payments, plus interest!
You will not be charged a penalty if only one PAYE amount is late in a tax year unless that payment is over six months late. The amount of the penalty will depend on how much is late and how many times your payments are late in a tax year. So, discounting the first late payment for which you won’t be charged:
- If you make between 1 and 3 late payments you will be charged 1% of the total amount that is late in that tax year;
- If you make between 4 and 6 late payments you will be charged 2%;
- If you make between 7 and 9 late payments you will be charged 3%;
- And for 10 and more 4%;
If you still have still not paid a monthly or quarterly amount in full, after six months you may have to pay a penalty of 5 per cent. A further penalty of 5 per cent may be charged if you have not paid after 12 months. These penalties may be charged in addition to the penalties already outstanding and may apply even where only one payment in the tax year is late.
An IT company, RealfruIT, made five payments late in the tax year 2010–11. The first late payment is not counted as a default, so RealfruIT had four defaults in total. A penalty of 2% was due, therefore, on the total amount of PAYE paid late. However, after six months, RealfruIT still had not paid the total arrears in full, so they were charged an additional 5%.
Penalties for errors and adjustments to PAYE – How much you’ll pay
Do not try and get away with rounding down what you owe for any reason, because you may be charged a late payment penalty if you pay less than is actually due even if you pay roughly the right amount each month or quarter and then make an end-of-year adjustment.
Contractors, keep in mind - the penalty date varies according to the type of payment:
HMRC assesses all determinations, assessments and amendments or corrections to returns from the “penalty date”, which is 30 days after the due date. This means that you could end up paying:
- a 5 per cent penalty if you have not paid the full amount within 30 days of the due date;
- an additional 5 per cent penalty if you have not paid the full amount within 6 months of the due date;
- a further 5 per cent penalty if you have not paid the full amount within 12 months of the due date.
3. Employer Annual Return – Filing and Penalties
Almost all employers are required to file their Employer Annual Return forms P35 and P14 online. You must ensure that they reach HMRC by the due dates or you will incur late-filing penalties. What’s more, separate penalties apply if you are required to file online but instead file a paper return.
Penalties for late P35 or P14 – How much you’ll pay
The deadline by which your Employer Annual Return (forms P35 and P14) must reach HMRC is May 19th. HMRC will remind you that a return is due or overdue at certain times during the year:
- An initial reminder will be sent by HMRC just before the end of the tax year;
- Another reminder will be issued by the end of April if you haven’t responded;
- If by May 19th the return still hasn’t been received, HMRC will write and advise that a penalty may already have been incurred and that the return must be with HMRC by June 19th in order to avoid further penalties.
If your return remains outstanding for more than four months, a penalty notice will be sent shortly after September 19th and again the following January and May. These penalty notices will show the amount of penalty owed. Penalties accrue for each month (or part month) that a return remains outstanding after the filing date. This is calculated at £100 per 50 employees for each month or part month you delay filing your return. That would hurt!
Moreover, remember, all the penalties in this second instalment of this guide – and those spelt out in part one - can be applied by the taxman (or Companies House, where relevant) at the same time. So if you get caught out on more than one of these penalty regimes, it has the potential to be ruinous for your company – even worse than putting you in the red and possibly into liquidation.