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HMRC has been engaged for some years in an extensive programme called Modernising, Powers, Deterrents and Safeguards. As part of this programme, HMRC consulted in June 2008 on penalties for late filing of returns and late payment of taxes. Workshops were conducted in September, shortly after the end of the consultation period. As is customary for Modernising Powers, Deterrents and Safeguards, the same consultation document considers many taxes, in this case including income tax, corporation tax, PAYE and VAT.

A new consultation document has been published today. It covers a great deal of ground, but the key proposals are:

1. For annual and one-off returns, e.g. CTSA or ITSA
2. For quarterly obligations, e.g. most VAT traders
3. For monthly obligations, e.g. most PAYE

1. For annual and one-off returns, e.g. CTSA or ITSA

Late filing

• An initial fixed penalty, which HMRC see as unlikely to be significantly increased from £100, its current level for self assessment.
• A fixed but modest daily penalty running for up to three months starting from three months after the return's due date. The document suggests the daily amount will be fixed in the statute. At present daily penalties can be charged at up to £60 per day and the document suggests that going forward the daily fixed amount will be very significantly less than this £60 per day. Under current law daily penalties require authorisation by the General or Special Commissioners. Under the new proposals authorisation will not be required, but there will be a right of appeal.
• Tax-geared penalties will arise seven and 12 months after the filing deadline. Under current CTSA rules tax-geared penalties arise six and 12 months after the filing deadline. An even more important difference is the base for tax-geared penalties. Under the proposals, they would be based on the tax shown on the return, whether or not it has been paid by the time the penalty arises. Under current legislation they are based on tax unpaid six months after the normal filing deadline. Under the proposals, the penalty could be up to 70% of the tax shown on the return if HMRC can demonstrate the late filing was deliberate and up to 100% if the liability was also concealed.

Late payment

In addition to interest charged on tax paid late, it is proposed to have tax-geared penalties one month (three months for corporation tax), six months and 12 months after the due date. For corporation tax, there are currently no such penalties, though for ITSA the surcharges (at 28 days late and six months late) are similar to the proposals.

2. For quarterly obligations, e.g. most VAT traders

Current VAT legislation wraps up late filing and late payment together. The new legislation treats the two separately.

Late filing
As with current VAT legislation a rolling default window starts to run from the first failure to submit a return by the filing date. The default window expires a year after the default. Further defaults extend the default window until a year after the latest default. The penalties would be fixed sums which increase as the number of defaults increase, though for the third and subsequent default the penalty per default would be the same.

It is also proposed that the tax geared penalties for very late filing at six and 12 months (including those for deliberate non-filing) should also apply to any quarterly return that is this late

Late payment
As for late filing the suggestion is for a rolling default window (but separate from the filing window). The first time the taxpayer defaults, they enter a default window which expires a year after the default. Further defaults extend the default window until a year after the latest default. The taxpayer can therefore only leave a default window by paying on time for 12 months.

The penalty would be calculated by reference to the number of defaults in the default window. The first default would not trigger a penalty at all and instead HMRC would issue a default notice. The penalties would be percentages of the tax unpaid which increase as the number of defaults increase, though for the fourth and subsequent default the percentage penalty per default would be the same.

As for annual or one off payment obligations, if the payment is more than six or 12 months late then further penalties are charged, calculated as a percentage of the tax unpaid at those points in time.

3. For monthly obligations, e.g. most PAYE

The June consultation document considered late payments of in-year PAYE separately. Many respondents to the consultation expressed disquiet at the three possible options outlined in the June consultation, (i.e. monthly statements, monthly estimates or extending the large employers' surcharge). A fourth, and in HMRC's view, better option is now being considered in more detail in this consultation. This involves requiring employers to report some additional information either on or alongside the end of year P35 return, which would be the amount due to be remitted to HMRC for each month of the year. The monthly figures would be an aggregate for each month and not split into the various elements, e.g. PAYE, NIC and CIS payments.

The objective of making employers report the amounts to be paid, with the knowledge that interest and penalties will be applied, is to deter employers from paying PAYE late.

HMRC will be able to reconcile this expanded end of year return with the in-year payment and identify any discrepancies. The focus of this reconciliation was whether the payments had been made on time and if HMRC consider that these entries are not accurate, they could be the subject of an audit. Employers would be liable to interest on late paid in-year PAYE from the date it is due to the date it is paid. If payments are repeatedly made late or the delay in payment was prolonged, employers will be subject to late payment penalties in the same way as other taxes.

If there is only one late payment in the year, there will be no penalty. If there is more than one default, the penalty will be calculated by first calculating the total amount of tax paid late in the year (excluding the first default) and multiplying the amount by a percentage which would be determined by reference to the number of defaults. For very late payment, amounts remaining unpaid six months after the due date, an additional penalty would be payable, calculated as a percentage of the unpaid tax. After 12 months, a further penalty is payable. This is in line with the approach taken across all taxes.

This would potentially apply to all employers and would replace the current large employer's surcharge.

The consultation document suggests the CIS scheme could be dealt with in the same way as PAYE. Further work continues on other monthly regimes.