The PAYE penalty notices saga has been the hot topic on AccountingWEB this week. Lucie Benson speaks to members about their experiences.

Judging from the numerous postings [1] received on AccountingWEB over the last few weeks, it seems that many of you have been affected by the 154,000 PAYE penalty notices for 2005/06 sent out last month for late submissions of P35 returns.

Considering the deadline for submission was 19 May last year, many people are now surprised that they have suddenly received these notices (starting at a whopping £900) almost a year later, with no prior warning.

HM Revenue and Customs defended this delay through an official statement that said: “We sent out 2005/06 penalties later than planned because we wanted to take proper account of returns we had not fully processed beforehand. For the same reason, we have chosen not yet to issue reminders for our 2005/06 returns.”

The statement went on to say that penalty notices have been issued only where records show an outstanding return for 2005-06.

Fair enough, but what has also got members’ backs up is the fact that, on top of this, there has been an additional delay concerning the date of issue to the date the penalties were actually received. Many notices were dated 12 March but not received until around 21 March.

This has, in turn, incurred further costs, as one member has discovered. “My concern about the current situation is that [the notices] were not issued until 12 March and none of our clients received them before 20 March, therefore the penalty had already increased by a further £100,” says Ian Vogan.

Accountant Geoff Browning had a similar experience with notices received. “These things all seem to be dated 12 March, but only thudded on to our doormats 12 days into the appeal period, which runs from the date of issue,” he remarks. “[None of us would] dream of pretending, as the tax office is doing, that a letter was sent on a certain day when it wasn't. It’s one rule for them and another one for us.”

Pushing for information

The Chartered Institute of Taxation (CIOT) has pledged to take up the whole penalty issue with HMRC. “As soon as we were aware of the size of the problem, and the potentially significant number of penalties that may have been issued either in error or where the individual companies weren’t aware that they had defaulted, we took this up with the Revenue,” says Tina Riches, technical director at the CIOT. “We are now pushing them for more information.”

She adds: “We are not happy with the fact that employers have received a £900 penalty when they weren’t even aware that they had defaulted. We have had a few people approach us confirming that if they had been aware that their return hadn’t been received by HMRC, perhaps a month after the deadline, they might have been able to do something about it. We are pressing HMRC in particular on that point.”

HMRC investigations have found that one of the main reasons for the issued penalties is because an employer had submitted a ‘test’, and not final, return. HMRC maintains that the penalty is warranted in this case, because it “cannot interpret a test return as being what the employer intends to send on their final return”.

Many of you have encountered problems with ‘test’ submissions, including accountant Susan Tyler. “Having received a penalty notice for a client, I checked my payroll software,” she explains. “The 'test submission' box was not ticked. I had no reason to test this submission since it was not the first return filed for 2005/06. Interestingly the software logs the return being received by HMRC gateway but is showing as not yet processed. Have HMRC suffered computer failure and data loss they have yet to own up to?”

Member Ken Pritchard experienced the same problem with the supposed ‘test’ return, when he realised he still hadn’t received the £250 filing incentive for a client, part way through the year. “We were given the excuse that a ‘test’ return was submitted by us,” he comments. “We do not run test returns. We checked the client's record and found that no test had been run and as far as we were concerned a full and properly acknowledged return had been submitted. The email they sent us fully acknowledged receipt and said it had been processed. We suggest taxpayers dig out their acknowledgement emails. We nevertheless had to re-file to get the return into their system as filed .We had no late penalty and the £250 was duly paid.”

However, member Euan MacLennan argues that the Revenue could be correct in this case. “A test return is, by definition, not a final return. It may be confusing that the responses to a test return are the same as those to a live return, but isn't that the point of a proper test? I would be surprised if the Revenue allows a successful test submission as valid grounds for appeal against the penalty.”

Another reason that has been suggested is failure to submit ‘nil’ returns. Accountant Rose Mullarkey says: “It will be interesting to obtain feedback of how the different districts handle appeals when a nil return should have been submitted but was not because the client, not having any employees, did not think that a return was due. In the bright and happy past, a nil return meant no penalty but this is apparently no longer the case.”

Incorrect penalties

It certainly appears to be the case that many penalty notices have been issued incorrectly for various reasons. As a result, there are now concerns about how relationships with clients will be affected, as well as how much time and money will now be wasted to sort the matter out, not to mention an apparent lack of understanding from HMRC of the situation, saying that they have issued previous warnings of a delay.

Francesca Lagerberg, ICAEW Tax Faculty chair, says: “HMRC flagged up on their website why they delayed sending out the notices, but what has happened, as so many people have found, is that the delay in sending out the notices has meant issues have gone on and on and it has left people with an unexpected and nasty surprise.”

She adds that HMRC should use this opportunity to redeem themselves, by providing straightforward clarification. “There is a real need for HMRC to offer a helpline or some quick guidance on what people can do when faced with these difficult issues. These are things that take up our time, cause real difficulty with our clients and actually if they didn’t crop up, our lives would be so much easier. Nobody wants to spend months dealing with these kinds of issues and nobody wants to be put in an awkward position with their clients.”

It is true that this kind of problem leads many clients to automatically blame accountants for any blunders.

“The part of this that I do not like is that my client immediately thinks I might have let him down, “says member Graham Brown. “I have to waste my time in explaining to the client what has happened, then I have to send an appeal and my client then has to pay something towards the cost of this.”

The CIOT’s Riches says: “Clients often assume that is the accountant’s fault when something like this happens, and it is really difficult for the accountant to then explain that they aren’t necessarily to blame.”

So what can be suggested as possible remedies to this situation? Member Gareth Vale proposes invoicing HMRC for wasted time. “Given their haste to issue penalties to clients perhaps they should consider paying practices a fee for dealing with their administrative inefficiencies,” he suggests. “We are only a small practice and after recently reviewing the amount of time spent dealing with HMRC, it is by far the largest overhead for our practice. Perhaps we should put together a fee invoice for the time spent sorting their inefficiencies and errors out; it appears unfair to pass the costs on to our clients.”

As Nichola Ross Martin pointed out in her article on mitigating the penalties [2], the first thing to do is to take into account why the penalty has been issued, stand your ground, and follow the correct processes to appeal. If approaching the PAYE office proves unsuccessful, then you can consider appealing to the commissioners.

Individual basis

The HMRC is maintaining that all appeals will be dealt with on a case-by-case basis and any individual queries should be discussed with your local office.

Member Michael Scott received around 30 penalty notices and has appealed against all of them. He sent a copy of the confirmation email originally received from the Revenue with each appeal. All penalties were issued on the basis that they were filed as a ‘test’ return. So far, one appeal for a client has been accepted due to the fact that the letter that HMRC sent to Scott said that the yellow ‘test’ flags did not appear on screen for the year ended 5 April 2006, because “the first time that agents or employers became aware that their P35 was to be treated as a test submission was on contacting this office enquiring as to when they would receive their online incentive.”

Scott says: “Hopefully all districts would have been contacted by head office so we are now expecting an avalanche of accepted appeals.”

Lagerberg doesn’t believe this issue is going to further dent HMRC relationships with the profession. “What is really promising, however, is that HMRC are doing podcasts [3] to try to improve their work with intermediaries and tax advisers,” she remarks. “I am all for that, but what we need is some concrete action to get to the situation where they can provide some real support. We want to see more help, more clarity and more guidance on these kinds of matters. This is a way HMRC could really help resolve some of these trust issues.”

But what impact will all this have on the long term Lord Carter programme? “It shouldn’t affect it because they have delayed many of the Lord Carter mandatory filing deadlines by at least a year,” remarks Lagerberg. “The only downside is that it throws up a broader concern about IT filing – are they robust enough? Will people do something wrong because they are not familiar with the systems? Again, this is an opportunity for HMRC to learn lessons because nobody wants to see any of the e-filing projects fall apart.

“It is very frustrating because I genuinely believe that HMRC is trying to make the IT better and to make more sensible administrative decisions, so it is difficult when something like this happens,” she adds. “We know they are trying to make it better, but this just doesn’t help.”