The First-tier Tribunal’s (“FTT”) recent decision in CED Ltd v Her Majesty Revenue & Customs (“HMRC”) raises a significant argument for those having to meet pay-as-you-earn (“PAYE”) tax liabilities without fear of late payment penalties.
What are HMRC PAYE Late Payment Penalties?
The payment of PAYE tax to HMRC now falls on the 19th day of each month.
On 6 April 2010, HMRC introduced new penalties for the late payment of PAYE tax. These PAYE late payment penalties apply to all employers and contractors and are determined by the number of defaults (i.e. late payments) in a given tax year.
The first default is exempt from a penalty if it is the only late payment in the tax year. However if there are further defaults by the taxpayer, then this gives rise to a penalty:
- When there are 2, 3 or 4 defaults in a tax year the penalty is 1% of the total of the defaults (including the first default);
- When there are 5, 6 or 7 defaults the penalty is 2% of the total of the defaults;
- When there are 8, 9 or 10 defaults the penalty is 3% of the total amount of the defaults; and
- For 11 or more defaults the penalty is 4% of the total defaults.
In addition, any amounts that have gone unpaid for more than six months after the penalty date is liable to a penalty of 5%, and if the PAYE payment has gone unpaid for 12 months a further penalty of 5% also applies.
Appealing against HMRC PAYE Penalties
Paragraph 14 of Schedule 56, Finance Act 2009, gives a taxpayer the right to appeal against a HMRC decision that a penalty is payable due to a late payment of tax. Furthermore, Paragraph 15 of Schedule 56, Finance Act 2009, provides that on such an appeal the FTT may affirm or cancel HMRC’s decision.
In CED Ltd v HMRC the question for determination by the FTT was whether HMRC had properly charged CED Ltd penalties for late payment at 3% (amounting to £22,735) on the basis that CED Ltd had failed to make PAYE payments to HMRC on time and without reasonable excuse.
In particular, this case turned on a dispute about the dates on which PAYE cheques were received by HMRC, Mr Richard Davis (CED Ltd’s financial director and company secretary), who had been responsible for making CED Ltd’s tax payments to HMRC for 20 years, argued that “CED had always paid PAYE by cheque, with each payment sent by first class post to HMRC”.
On the facts, the FTT was satisfied by CED Ltd’s evidence about their postal arrangements and was not convinced that the “processing date” stamped by HMRC necessarily represented the actual date of receipt.
The more general point, however, concerned the question of whether it is reasonable to rely on the postal service to deliver a first class letter the next day. In this case, the FTT had regard to the fact that the taxpayer had regularly posted the tax payments on the day before the due date (or earlier if the due date fell at the weekend). The UK postal service does not, of course, give an absolute guarantee that letters will be delivered the next day but the FTT felt that it was reasonable to rely on the assumption that they would be so delivered, the FTT stated that:
“The critical question is whether the letters containing the PAYE cheques were posted on time. A person can, we think, reasonably expect that a letter posted first class on Day 1 will reach its destination on Day 2. The [General Post Office’s] published aim is to deliver 93% of first class mail on the following day. Thus, CED would, unless something exceptional had occurred, have a reasonable excuse for late payment were the letter to be delivered later.”
PAYE Penalty Appeals before the Tax Tribunal
Therefore, this case illustrates that if a taxpayer’s compliance record and cash flow history are good and if it can demonstrate that tax payments were sent by first class post at least one working day before the payment due date (i.e. 19th of each month) then despite the fact that the FTT’s decision are not binding it will have a good chance of succeeding in its appeal.
We have recently had success against HMRC in assisting clients facing PAYE penalties and have managed to reduce these penalties. If you have received a penalty and wish your case to be reviewed get in touch with one of our HMRC tax dispute specialist lawyers via our contact form.