HM REVENUE & CUSTOMS SECURING COMPLIANCE WITH REAL TIME INFORMATION LATE FILING AND LATE PAYMENT PENALTIES. Response by

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1 HM REVENUE & CUSTOMS SECURING COMPLIANCE WITH REAL TIME INFORMATION LATE FILING AND LATE PAYMENT PENALTIES Response by THE SOCIETY OF PROFESSIONAL ACCOUNTANTS 6 September 2012 PETER J D MITCHELL, FCA, FCCA, CHAIRMAN

2 SECURING COMPLIANCE WITH REAL TIME INFORMATION LATE FILING AND LATE PAYMENT PENALTIES INDEX Section Page 1. Executive Summary 4 2. Background to The Society of Professional Accountants 9 3. Detailed Responses to Questions Posed 10 2

3 SECURING COMPLIANCE WITH REAL TIME INFORMATION LATE FILING AND LATE PAYMENT PENALTIES 1. EXECUTIVE SUMMARY 1.1 The Society of Professional Accountants (SPA) welcomes the opportunity of commenting on HMRC s Consultation Securing Compliance with Real Time Information Late Filing and Late Payment Penalties, and is pleased to note the adoption of the principal suggestion submitted in February 2011 Security of PAYE and NICs that a copy of the periodic payroll accompany each payment of PAYE/NIC so that reconciliation of all sums due can be immediately made. 1.2 As is evident from SPA s focus on small businesses - principally those employing 10 or less employees - our comments may impact on larger employers but do not necessarily reflect specific experience of or needs of such organisations. 1.3 The law must be clear about employers responsibilities SPA s view is that wilful non-payment of any tax collected such as VAT, or deducted from payroll as in the case of PAYE and NIC, is a criminal offence for which the employers be they individuals, managers, owners or directors are personally responsible. 1.4 The law must make employers position clear as, if the responsibility can be personally avoided, any shortfall or loss will instead be borne proportionately by innocent members of the public. Where Does the Problem Lie in the Main? 1.5 Although the analysis of PAYE and NIC debt by size of business requested by SPA in its response to Security of PAYE and NIC s has not been provided, HMRC acknowledges that the majority of those operating PAYE schemes want to and do obey the law and, by definition, it follows that the impact on the Exchequer of almost all small employers must be minimal; it may thus be extrapolated that it is principally larger 3

4 employers to whom the vast majority of uncollected Income Tax and National Insurance relates. 1.6 It follows that the impact of HMRC s proposed penalties on the vast majority of already compliant small businesses should not punish inadvertent oversight or occasional non-compliance. 1.7 The Real Economic Impact of RTI on Smaller Employers It should be recognised that HMRC s proposals represent the adoption of a new system by all employers, which will involve additional employer effort and potentially new investment in computer services or agency support to accommodate HMRC s requirements. These are real costs to employers, but are not identified within the Economic Impact on page 33 of your consultation document. 1.4 Safeguard for Small Employers In our view the proposed RTI system should not impose penalties on small employers with less than 10 employees, without certain key safeguards or options being put in place: i. Before committing to the roll out of the implementation programme it is vital that the pilot testing currently underway is comprehensive, and confirms to employers and agents that: All notified errors or omissions have been resolved The HMRC system is simplistic to run Other software houses offering an RTI systems that have been accredited and listed An employer with only one or two employees should have the option to continue to file paper returns and should be exempted from RTI penalties. 4

5 i The RTI system is given one fiscal year to settle down, during which period HMRC will issue warning notices reflecting any penalties or interest that would be incurred had the penalty system be on live we suggest that full implementation be by 6 April iv Following full implementation as in (ii) above, all employers are allowed one late filing in a period of three months which, as with VAT, would trigger a warning notice that the next occurrence within the following twelve months would cause a penalty to be applied. 1.8 Proposed Remedies to Maintain or Improve Collection Processes If the argument in (1.2) above is accepted then, as SPA submitted in its response to Security of PAYE and NICs, HMRC needs to beef up its collection processes towards larger employers, and our previous suggestions are repeated below:- i. An undertaking (is obtained) from all those requesting PAYE schemes that they accept personal responsibility for any deductions made but not paid over where it can be shown that such action represents wilful avoidance. Secondly that a copy of their periodic payrolls would accompany each payment of PAYE/NIC so that reconciliation of all sums due can be immediately made. Where suspicion has been raised of wilful avoidance, obtain access to details of business bank accounts to monitor actual trading activity. i Make telephone or other contact with all late paying employers (within) 10 working days after a missed payment to obtain a status report or explanation. iv. Make more collectors available to visit trading premises where significant unreported employment activity was known or believed to be taking place. The law should make plain that the non-payment to HMRC of for (i) above all other taxes 5

6 collected, such as VAT, or retained such as PAYE/NIC, is a criminal offence for which the business owners or directors will be held personally responsible. v. Procedures for collection of all taxes and penalties for non-payment should be consistent, hence widely understood by the public at large, whether PAYE/NIC, VAT, Excise Duties or other taxes. 1.9 Pro-active Collection Tax collectors should be mobilised to visit business premises of the largest employers (by value or by number of employees) as soon as a payment date is missed and, if no remedy is offered and accepted to rectify any non-payment, the law should provide for a fast track method of closing failing businesses down before losses to the Exchequer are allowed to escalate Fair and Proportionate Penalties by Size of Employer Any penalties for late filing must be fair and proportionate and, for an employer with fewer than 10 employees, a penalty of 100 will represent the correct amount of encouragement to ensure subsequent filing of returns on time; conversely for a business employing 150 people a penalty of 1500 will hardly be a deterrent compared to the PAYE and NIC deductions within a gross monthly payroll of possibly 200,000 (and rather more if it is a football club in the upper 4 divisions!) Accordingly we have proposed revisions to the tables suggested at Q Any penalties for late payment should be interest based and consistently applied over all taxes. Accrual of interest should be on the simple interest basis. For those employing up to ten employees it is felt that the filing of the payroll should be permitted at any time up to the date of PAYE and NIC deductions are due to be paid to HMRC; the advantage to HMRC in seeing this information on file earlier is not evident, and days of grace presently accorded for monthly payment of PAYE and NIC should enable innocent oversights or effect of absence of key staff to be minimised. 6

7 1.12 Improved HMRC Support for the Employer or Agent i. It is probable that a high level of enquiries will occur during the phasing in period, and it is critical that HMRC provide a prompt response system particularly by phone where Agents currently benefit from bespoke telephone numbers. Experiences of attempting to use the ordinary contact phone numbers has been hugely frustrating in the long delays occasioned; more manned 0800 help-lines would be welcomed. i It would improve public relations for HMRC to publish its Code of Behaviour for RTI and then keep to it in terms of timely response to phone and requests for guidance or assistance. 7

8 SECURING COMPLIANCE WITH REAL TIME INFORMATION LATE FILING AND LATE PAYMENT PENALTIES 2. BACKGROUND TO THE SOCIETY OF PROFESSIONAL ACCOUNTANTS 2.1 SPA is a wholly independent society of small practitioners holding a qualification issued by a recognised professional accountancy Institute. It was formed in early 1996 and currently there are some 1600 principals in 1200 member practices. Our members provide accountancy and taxation services to an estimated 175,000 private businesses and approaching 500,000 individuals. Of the private businesses around 50% are unincorporated. 2.2 The Society s stated policy is to promote and improve the relationship between members and their Institutes by providing constructive criticism together with practical proposals for improvements. Further to provide commentary and proposals to other authorities influencing members practising environment. 2.3 SPA has previously made submissions on small businesses limited company activities to the DTI on Audit Exemption levels, to the Accountancy Standards Board on Financial Reporting Standards for Small Entities (FRSSE), to the DTI on Modern Company Law Developing the Framework, to the Chancellor of the Exchequer concerning individual tax payers on Advancing Self Assessment Tax Return Filing Dates, and to HM Revenue and Customs on various tax and NI consultations impacting on small practices and their clients. 8

9 SECURING COMPLIANCE WITH REAL TIME INFORMATION LATE FILING AND LATE PAYMENT PENALTIES 3. DETAILED RESPONSES TO QUESTIONS POSED Q1. Do you have any comments on RTI and error penalties that will help us support businesses and promote timely filing under RTI? i. Before final implementation of RTI, the results of pilot testing should be published to demonstrate to employers the robustness of the system, that testing has been comprehensive and inclusive and that the system is bug free. All small employers with 10 or less employees should be given a full fiscal year to bed down their reporting requirements without penalty, but to whom warnings would be provided by HMRC to give guidance of potential non-compliance. i During the RTI registration process employers should be able to identify their payment frequency, be it daily, weekly, fortnightly, four weekly, monthly, quarterly or annually. Any filing non-compliance would then follow (vi) below. iv. Returns should not be deemed late or subject to penalty until the due date for payment of PAYE or NIC s is reached. v. A simple method or form should be available for making minor corrections, without penalty, to filed returns. vi. The penalty regime should follow that already established for VAT, only one act of non-compliance permitted without penalty in any period of 3 months, with any non compliance in the following 12 months penalised. v Any penalties sought under RTI should provide for a simple online or paper appeals process. viwe strongly suggest that for employers or businesses with only 1 or 2 employees they be given the option to file paper returns as now, and be exempt from the RTI penalty regime. ix. A list of accredited software houses providing RTI software should be issued no later than

10 Q2. How best can we support employers in understanding their obligations under RTI and implementing the new system? i A full media campaign similar to that for Self Assessment Tax Returns should be undertaken T.V., Radio, Press and Poster. Agents should be provided with communication aids Newsletters and CD Roms of HMRC s RTI software. i Workshops for Employers and Agents explaining the introduction of RTI should be held at principal city centres. Q3. Is there a better or simpler way, than banding by potential filing defaults, of recognising the size of the employer but also the amount and regularity of the information to be supplied under RTI? i. The vast majority of small employers with less than 10 employees are believed to operate the current PAYE schemes accurately and in a timely manner; the impact on such business of any penalty regime should be minimal enough to encourage accuracy but not to punish occasional inadvertent non-compliance. Levels of penalty must be fair and proportionate, and we believe banding penalties by number of employees in the most appropriate method of providing a tiered payments regime that is relevant and significant to the size of an employer. Q4. Are there particular adjustments that should be considered to take account of more frequent payments? i. Any penalties incurred should be accrued into a quarterly accounting period for settlement irrespective of the frequency the payroll is run. An notification should be sent by HMRC of each penalty arising in a quarterly period. i A itemised payment demand should be sent by at the end of each quarterly period. Q5. Should a penalty be charged as soon as a return is late or would employers prefer penalties to be charged later, perhaps each quarter? See response to Q4. 10

11 Q6. Do you agree that only one late filing penalty should apply to each PAYE scheme each month, regardless of how many returns are late that month? i. Yes. If payrolls are run more frequently than once a month then, as long as all payrolls within that month are filed by the end of that month, there should be no penalty. Q7. Should the RTI late filing penalties include a further penalty if a return is outstanding at the 6 and 12 month points? i. Yes, a 5% penalty at each of 6 and 12 months is found within Self Assessment Income Tax. In respect of larger employers action should have been taken within HMRC s collection processes no later than 1 month after a payment date has been missed. Q8. What are the benefits and downsides of phasing the introduction of automatic late filing penalties for RTI along the lines set out above? i. In our view little or no phasing will be required for major employers being those with 150 or more employees. HMRC officers should monitor these employers closely and act promptly to chase any non-compliance. For medium sized employers, those with between 11 and 150 employees there should be a minimum phasing in period of 6 months, as most will have organised payroll departments or staff. i The benefits will come from beefing up prompt inspection and collection activities - to put more officers on the ground to contact or visit large and medium sized employers at the first signs of non-compliance. iv. For small employers with 10 or less employers a phasing in period of a year seems appropriate as they may have little or no organised payroll functions, and will need to absorb the new system within their limited administrative resources. Q9. Should consideration be given to including a default that does not attract a penalty along any of the lines set out above? i. Yes, as with VAT returns, any non-compliance in a period of three months should receive a warning notice that a further act of non-compliance will attract a penalty if occurring in the following 12 months. 11

12 Q10. We would be grateful for comments on the detailed design options set out above. In particular, how should we encourage employers to use the nil return facility where there is no information to be returned? Is any additional incentive or sanction needed over and above the fact that a late filing penalty may be issued if an expected return is not received? i. We agree that any penalties levied should be accumulated into a quarterly demand, and can accept that differing quarter end dates may be set to the necessary flow of information for HMRC. We endorse the idea of alerts to employers or their agents as interim notification of penalties incurred subject to appeal. We do not think that, once a fair and proportionate monthly penalty regime has been established, that any cap is required; the penalties are set as the necessary incentive for employers to take action to be compliant. i Online appeals will be efficient. Over the introductory period, i.e. before penalties commence, it would be sensible to develop a list of acceptable excuses for late filing. Q11. What are the pros and cons of charging penalties for late filing and late payment at the same time? i. We do not believe late filing and late payment penalties should be charged together as they reflect quite different aspects. a) Late filing is a rules based activity subject to scale by number of employees b) Late payment is a calculation based on time and quantum of unpaid PAYE and NICs. A minimum amount of penalty interest incurred under the rules should be established, say 100, below which it would not be charged. Q12. We would be grateful for comments on these models, or any combination of the elements included in the models. We would especially welcome ideas to simplify them, but which still support and encourage compliance with the RTI information obligation. i. We believe that those employing only one or two individuals should be exempted from RTI penalties, and have the option of filing returns either on-line or in paper format. Such treatment will greatly assist the occasional non-business employment of an individual or two, and minimise attendant administrative effort. We suggest that an initial band of 3 to 10 employees be adopted to provide a low starting level into which the majority of employers will fall, and for whom a fair and proportionate penalty system would apply to reflect their size. 12

13 As mentioned in SPA s Executive Summary at 1.10 penalties should reflect the number of employees and size of business and, to be effective, penalties must be a meaningful size. Accordingly our scale band penalties are significantly higher than the HMRC proposals in its model table see below. Model with Additional Features, penalty rates Band employees Band employees Band employees Band employees Band employees Band employees Etc. Penalty for first default in year Penalty for 1-4 later defaults in same tax month as 1 st default for year Penalty for 1-5 defaults in a later tax month Minimum penalty to be charged per quarter (including suspended penalties coming into charge Additional penalty where no returns have been received for 6 months Additional penalty where no returns have been received for 12 months ,000 1,000 1,000 1,000 1, ,500 1,500 1,500 1,500 1, ,000 2,000 2,000 2,000 2, ,500 2,500 2,500 2,500 2,500 Q13. We welcome comments on these proposals. (This refers to the changes to the existing late payment penalty model). i. We note the proposed changes which will provide clarity and certainty in respect of RTI late payment penalties. Q14. Should we consider charging late payment penalties quarterly? i. Yes, see earlier response to Q4, with a de minimus amount of

14 Q15. Should we consider allocating employers to a quarterly stagger period for both late payment and late filing penalties under RTI? i. Yes, we can see no reason why this proposal would be unacceptable to employers or their agents. Q16. Are there any particular easements that we should consider for new employers? i. Any new employer after 1 April 2014 should be permitted the same phasing-in period, free of any RTI penalties, as suggested in our response to Q8. Q17. Do you have any views on applying interest to late payment and late filing penalties under RTI? i. We would support the policy that simple interest will be added to late paid late filing penalties as is now the case for both Income Tax and Corporation Tax. Q18. Do you have any views on applying a late payment penalty as well as interest where further sums become due for a period? i. We would support the policy that late payment penalties of 5% be added to unpaid RTI penalties after 6 and after 12 months. This provides consistency with Income Tax and Corporation Tax, but should never prove necessary for medium and large employers given better HMRC collection processes (see SPA Executive Summary 1.8). The Society of Professional Accountants 95 High Street Great Missenden Buckinghamshire HP16 OAL mail@spa.org.uk 14