RECENT TRIBUNAL decisions on penalties for PAYE returns that are filed late are inconsistent, and the taxman should issue penalty notices to taxpayers more promptly after a deadline is missed, a senior tax accountant said.
As HM Revenue and Customs (HMRC) prepares to challenge a tribunal ruling that criticised its practice of allowing fines to accumulate before issuing penalty notices, recent tribunals have reached different verdicts on the increasingly controversial subject.
Chas Roy-Chowdhury, head of taxation at the ACCA accountancy institute, said tribunal decisions on penalties were "all over the place".
The taxman should be more understanding if businesses make an honest mistake when submitting end-of-year P35 returns - which show employees' income tax and national insurance contributions - Roy-Chowdhury added.
For example, some businesses, or their tax advisers, may mistakenly send a "test version" of their P35, wrongly believing that they have completed the return.
In Croydon North Conservative Association v commissioners for HMRC - heard in the first-tier tribunal last November - the association appealed against an "unfair" £800 penalty for a P35 return that was filed late.
The employer filed their P35 online on 30 March 2011 - more than ten months after the 19 May 2010 deadline for sending the return.
The association appealed against the fine, arguing that its treasurer had no experience of PAYE. It also said that HMRC had taken eight months to notify it about the fine and that an earlier call or letter explaining that the P35 was late would have solved the problem.
The tribunal ruled in favour of the taxman, concluding that penalty notices were not intended to serve as reminders and that burden was on the taxpayer to establish a reasonable excuse for late returns.
In another case about tax penalties - Global Legalisation Services Limited v the commissioners for HMRC - heard in the first-tier tribunal last August - a company successfully appealed against a £800 penalty for a P35 form that was sent late.
The company's tax adviser said that it believed it had filed the return successfully.
After sending the the P35 return online the agent received an email from HMRC confirming receipt but warning that if the submission was a "test submission" the form should be resent using the "live transmission" in order to be processed.
HMRC said that sending a "test submission" requires the employer to "actively access test mode on the system" - meaning that the employer does not have a reasonable excuse for sending the form late.
Roy-Chowdhury said that the taxman should be prepared to reduce tax penalties to encourage people to file late returns quickly.
"When HMRC issues penalties [for late filing of a P35 form] it could say there is a £500 penalty but if you file within 30 days you will pay £100," he said.
A plan to collect income tax and national insurance contributions from employees' pay packets in "real time" rather than annually should make it easier for HMRC officials to send tax reminders and penalties quicker. The new system is due to start from April 2013.
Under real-time PAYE, employers will send HMRC information about tax and other deductions from employees' pay when, or before they make the salary or wage payment to the employee, rather than sending returns at the end of the year under the current system.
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