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The PAYE penalty problem. By Lucie Benson

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13th Apr 2007
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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 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.”

The appeal process

HMRC advises that, when employers believe that a penalty is incorrect, they must appeal in writing to their HMRC office by Monday 23 April. HMRC has officially stated that “the appeal should state the reason why the penalty is incorrect and details of any return that the employer believes was properly submitted.”

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, 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 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.”

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Replies (8)

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By mike.rofe
13th Apr 2007 12:42

Coverage and petitions
Well I just emailed the BBC's have your say in order to see if we can get it reported in mainstream media.

Maybe Tracey should start a petition on Number 10's website? So far as I can tell there isn't one in existence so far. That's http://petitions.pm.gov.uk/ if you're interested, Tracey.

Euan MacLennan's point about the test submission emails is valid to an extent, but why on earth couldn't the subject line of those emails be "Test submission successful" rather than whatever the usual is?

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By Nick Graves
13th Apr 2007 13:01

Revolution?
Tracey makes some excellent points - it's long been a mystery to me how controlled & asinine the meeja appears to be these days.

There IS a real danger of becoming a lone voice, shouting in the darkmess. Better to join an existing organisation, rather than end up like the Popular Front of Judea.

For an example of opposing the downright lies & oppression on the motorist, the Association of British Drivers is beginning slowly to gain support &credibility. They are finally NOT being seen as a bunch of nutters, as they are portrayed by those quangos with the ear of Government. Many are now seeing this is actually the new reality.

It's long overdue that this constant raping of small businesses has not been exposed in a similar vein. If there IS no such organisation, then yes, it's long overdue that it was started!

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By creaseystony
13th Apr 2007 14:57

Also Returns CIS36
It's not just P35s which have caused the problem. A client of mine also pays subbies under CIS, the tax was included on the P35 and paid on-line with the PAYE so our client thought that there was no need to complete the CIS36 Return. No tax lost to HMRC but still a penalty of £900. Now that we are aware of the matter we have advised our client to comlete the CIS36 but it would have been helpful to all concerned if early reminders had been sent out. We have appealed and await their response but let's hope that it's not another nine month delay.

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By compupaye
13th Apr 2007 14:47

HMRC Website agent list problem
We are a payroll bureau and submitted around 300 returns last year. 6 of these penalties were received, 5 from companies where P35s were NOT DUE and one which was submitted online via the software 15 May 2006 at 19.57pm.

Every month since June 2006, I have logged onto the PAYE online system for Agents to check that all the 300+ year end returns submitted said "YES". This facility is available to all payroll Agents who file online. All 300+ including those we got an email receipt for were still saying "NO". I was told on enquiry that they will eventually change to "YES" when a human being from each local office finalise the return for the year. I have since checked every month from July right up to Dec 2006 and noted that they nearly all of our clients were still saying "NO". The same problem happened last year.

We were unaware that the HMRC systems had not captured this company's data until 21 March 2007. We re-filed on 21 March and sent in our appeal. Since then another £200 penalty has arrived making it £1100 in total!!

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By 0862937
16th Apr 2007 12:41

Ambiguous e mail
Last week , I started electronic filing of P35's for 2006/2007 and received from the HMC & E, for each one filed, the acknowledgement e mail as last year.

On filing some more today, the wording of the e mail has changed. An additional sencence has been added as follows:

"If this was a test transmission, remember you still need to send your actual Employer Annual Return using the live transmission in order for it to be processed. "

This is not a confirmation at all now. What on earth do we do now? The only solution is to send a letter for each client to HM C & E asking for written confirmation that the P35 has been electronically received.

Does anyone use a test transmission ever?
Why doesnt HM C & E just abandon test transmissions.

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By frauke
16th Apr 2007 15:59

And next year?
I can only count my self as lucky so far - but I've just run into a problem with a my last submission for 2006/07. A new payroll taken on from another service.

The submission failed because I have now been told that one for 2006/07 was accepted on the 06 April 2006! The internet helpline suggested I speak to the local office. I spoke to them and they have no record of the submission. The current suggestion (from the local office) is to either submit it manually - or ring the help line tommorrow and see if I can arrange to submit an "amended P35" .

Having been told when they first started internet submissions, that amended returns where acceptable for resubmission - and then a year later, receiving letters informing me that they were NOT acceptable - and I would have resubmit the amended returns manually...... ?????

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By rogtuf
16th Apr 2007 17:04

PAYE Penalties - A darker side
We had this same problem last year. We have seen a penalty notice issued when the return was known to be sitting in a box of unprocessed returns at the district 6 months after the filing deadline, and was the subject of a time geared penalty.

If the officer who issued the penalty notice (who is named on the notice) either knew, or should reasonably have known that there were unprocessed returns at the district, then there is a darker side to this penalty issue, and I am sure that the implications will not be lost on readers.

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By Mikeparr
18th Apr 2007 10:58

Good Friday
My clients Notice of Penalty Determination for 2005/6 was issued on 6 April 2007(Good Friday) for £1,000 and not received until 16 April

Working over the Easter Holidays to obtain another months penalty - I don't think so.

Incidentally the information had been sent on line on 30 March 2006

We will see what happens with our appeal

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