News Items – at 26th June 2008

Introduction

Two new HMRC consultation documents are reviewed this week and the proposals provide food for thought for everyone working in payroll.  The first considers proposals for new penalty arrangements for filing payroll returns late and for making payments late.  HMRC is interested in changing your behaviour (!) and any new penalty regime will be tailored accordingly.  The second document asks for views on a new approach to charging interest on late payments, or paying interest on overpayments.  Both consultation documents have the potential for significant changes to PAYE procedures.

Our FAQ this week looks at company cars provided for lower-paid employees and we also have items specific to Jersey and to the Irish Republic.

Filing Tax Returns and Paying Tax On Time

HMRC consults on a new approach to penalties

There are a number of different penalty structures across the taxes and duties administered by HMRC, the framework and legislation for which were inherited from the Inland Revenue and HM Customs and Excise.  As many taxpayers, particularly businesses, interact with HMRC across a range of taxes, HMRC is concerned that the differences are viewed as adding unnecessary complexity and burdens to the tax system.

As part of the review of Powers, Deterrents and Safeguards, HMRC has been developing ideas and consulting on how to modernise and align its civil financial penalties.  The first substantial measure, legislated in the Finance Act 2007, was a single new penalty regime for incorrect returns for income tax, corporation tax, PAYE, NICs and VAT.  Further measures in the Finance Bill 2008 will extend this approach to other taxes and to failure to notify new taxable activities.

A new consultation document, entitled Meeting the obligations to file returns and pay tax
on time, was published by HMRC on 19 June 2008.  This consultation

• considers the principles on which a new penalty structure for
  • failure to file a tax return, or to do so on time
  • failure to pay tax liabilities, or to do so on time, and
• invites comments on measures for delivering a more consistent, fair and effective penalty regime.

The first part of this brief review has relevance to tax returns and payments, such as self-assessment income tax, corporation tax, VAT, PAYE and Construction Industry Scheme, where returns are due by a set date and the payments in respect of that return are due in full by a set date.  A separate section of the consultation document considers the special monthly and annual problems raised by the in-year payment by employers of PAYE tax collected on behalf of their employees.  Curiously, the current consultation does not extend to NICs or to Student loan deductions, even though they are included in the same returns at PAYE tax.  No explanation given as to why they are not included.

Some of the important factors that HMRC’s research indicates should be considered in devising new penalty structures for failure to file or pay on time are as follows.

Most taxpayers delay filing their returns until close to the deadline and then fail to file or pay on time because other priorities, such as domestic or business emergencies, arise close to the deadline.
Many taxpayers do not understand they need to file a return, the importance of doing so on time or how they should go about doing so.

Taxpayers fail to pay their tax on time because they put other financial priorities first, e.g. paying creditors who may stop supply if they are not paid on time.  HMRC is unable to stop the supply of services for non-payment of taxes or stop tax debt increasing.

There is a difference between those who intend to meet their obligations and those who deliberately fail to meet their obligations, and HMRC’s support and sanctions should accommodate these different types of behaviour.

HMRC suggests, therefore, that the following behavioural patterns should be taken into consideration in devising a new penalty regime:

Other issues raised in the consultation document are as follows.

• Where taxpayers with cash flow difficulties enter into  a “time to pay arrangement”, allowing them to make their payments in instalments over a period of time, what penalty regime should apply if the arrangements are not adhered to?
• As it would not be cost effective to consider the underlying behaviour of each taxpayer before applying penalties and, as a result, penalties will likely be issued automatically, what safeguards would be appropriate to protect the taxpayer?  A “reasonable excuse” provision is included in the Finance Bill 2008.
• Should the “capping” of penalties, where the maximum penalty is limited to the amount of tax unpaid, be retained?  This procedure currently applies for both PAYE and NICs.
• penalties for taxpayers who repeatedly file or pay shortly after the due date, such as higher penalties the second or third time?

The different “tools” available to HMRC to tackle late filing and payment are:

• determinations or assessments
• fixed sum penalties
• tax geared penalties
• daily penalties
• enforcement action.

Using a combination of these different “tools”, HMRC suggests two new penalty structures that involve a sequence of penalties and that are designed to influence taxpayer behaviour.

Late or non-filing

1. an initial fixed penalty for failure to file on time
2. a further fixed penalty, perhaps a month later, if the return is not filed quickly
3. a tax-geared penalty for continued failure, after a further 6 months
4. a further tax-geared penalty, at a higher level, after perhaps 12 months
5. assessments or determinations could be issued by HMRC at any time
6. daily penalties, without the need for pre-authorisation by the General or Special Commissioners (as is currently required), for those who persistently fail to file.

Late or non-payment

1. an initial fixed penalty for failure to pay on time
2. a tax-geared penalty for failure to pay after 1 or 2 months
3. a further tax-geared penalty, at a higher level, after perhaps 6 months
4. a further tax-geared penalty, at a higher level, after 12 months
5. enforcement action, at any time, if it is clear that there is no intention to pay.

A suggested refinement to the tax-geared penalty is to relate it to the degree of lateness by accruing the penalty on a daily basis, and charging it to the taxpayer at fixed intervals.

Any new penalty structure would include protections for taxpayers, with facilities for appealing against penalties.

Payment of PAYE tax
The proposals described above are not directly relevant to the payment of PAYE tax, collected by employers on behalf of their employees and paid monthly or quarterly to HMRC’s Accounts Office.  HMRC’s sees the design of appropriate sanctions for late or non-payment of PAYE tax as a “significant challenge”.  Employers are required to pay monthly or quarterly during a tax year but are not required to file their P35 return to indicate the amounts collected until after the end of the tax year.  HMRC cannot, therefore, know whether the employer is paying the correct amount each month or quarter during the tax year.

The proportion of taxpayers currently paying their in-year PAYE on time is significantly lower than the proportion paying other taxes on time, at around 60% (apart from large employers, where it has increased to over 95% as the result of special payment compliance rules).

The Public Accounts Committee and the National Audit Office have previously noted the challenges faced by HMRC in ensuring timely payment of in year PAYE and recommended that surcharges be used to tackle late or non payment.  Statutory surcharges are already used to enforce the payment rules for “large” employers with 250 or more employees.

HMRC’s view is that some of the penalty “tools” already described may be applicable to PAYE, i.e.

• fixed penalties,
• tax geared penalties
• enforcement action, in conjunction with compliance visits.

However, before these tools can be used to tackle late or non-payment, the issue of how HMRC can determine whether the in-year payments are correct has to be addressed.  The consultation document makes three suggestions.

1. Extend the statutory late payment surcharge arrangements for large employers to medium-sized employers, i.e. those with between 50 and 250 employees, after first reviewing the effectiveness of the existing system and making any appropriate changes.
2. Require employers to file a short monthly statement that sets out how much PAYE tax is due and the basis of the calculation.
3. An estimation by HMRC of the tax due each month, based on previous payments and the previous year’s return, and charge interest and/or a late fixed-sum or tax-geared penalty on any shortfall.  Employers would have to provide actual figures for the month concerned in order to have the penalty cancelled.

HMRC acknowledges that these options have the potential to create additional work for employers and is asking for views on the best way of encouraging employers to pay their in-year PAYE in full and on time, without creating unreasonable burdens for them.

The consultation document is available at the link given below.  Comments should be received by 11 September 2008.

Further information:
Meeting the obligations to file returns and pay tax on time   http://customs.hmrc.gov.uk/channelsPortalWebApp/
downloadFile?contentID=HMCE_PROD1_028673

Interest Paid on Underpaid and Overpaid Tax

HMRC consults on a new approach to interest

There are a number of different structures governing the interest that HMRC charges on late payments of tax and pays out on overpayments, the framework and legislation for which were inherited from the Inland Revenue and HM Customs and Excise.  As many taxpayers, particularly businesses, interact with HMRC across a range of taxes, HMRC is concerned that the differences are viewed as adding unnecessary complexity and burdens to the tax system.

A new consultation document, entitled Interest – Working Towards a Harmonised Regime, was published by HMRC on 19 June 2008.  This consultation considers ways on simplifying and harmonising how interest is charged and paid across tax regimes, rather than on making any changes to how the underlying tax regimes operate.  All taxes administered by HMRC are in the scope of this review, including PAYE tax and NICs, but excluding tax credits, child benefit and customs duties.

For the 2006/07 financial period, HMRC collected around £496 billion and repaid around £73 billion. Around £64bn (15%) of tax receipts are paid late, though a significant proportion of these are paid within a few days of the due date.

The purpose of interest is to reinforce the fact that particular taxes are due for payment on particular dates and to bring a degree of fairness into the system where those payment dates are met by some taxpayers but not by others.  It ensures that there is no advantage enjoyed by late payers.  However, interest is not intended to be a penalty for late payment and neither is it intended to influence behaviour.  If a payment is late, the taxpayer (having had use of the money and the Exchequer having been denied the use of the money) is charged interest as recompense.  Nevertheless, if interest charges are not to be perceived as a penalty, the level at which interest rates are set need to follow closely changes in market rates.

For most direct taxes, interest is generally charged on late payment of any liability and paid automatically on any liability which has been overpaid.  In the case of corporation tax it is also paid to the taxpayer on tax paid early.
One exception is PAYE tax, where interest is charged only after the end of the year on any amounts outstanding for that year.  The legislation requires that payments of PAYE are made ‘in-year’ but, where these are late, interest is not currently charged.  This means that the Government receives no recompense for these payments being made late.  Also, the system does not provide fairness between taxpayers as, without interest, those who do meet their obligations in-year have a commercial disadvantage.

This absence of interest was commented upon by the Public Accounts Committee in a report published in October 2007. The report stated: “Nearly 50% of businesses do not pay PAYE/NICs on time. The Department (HMRC) cannot impose a penalty or interest for late monthly payments of PAYE/NICs during the year.  It can do so only on balances due at the end of the tax year.  It should seek to remedy this situation.”

Calculation of rates
All interest rates charged and paid out by HMRC are set by reference to statutory formulae. Each tax has its own formula and there are nine formulae in total.  For example, the formula for calculating the rate to apply on late paid income tax, as defined in the Taxes (Interest Rate) Regulations 1989, is:
            “Reference Rate” + 2.5%
Each of these formulae have the same starting point for calculating the interest rate.  The legislation currently provides that this starting point, the “Basic Rate”, is an average of the basic lending rates applied by six of the UK’s banks.  The figure generated is then used to calculate the “Reference Rate”, in most cases by rounding the “Basic Rate” to the nearest whole number (with ½% rounded down).  However, beyond this starting point the formulae used are not consistent across all of the taxes that HMRC administers and there are, in fact, eight different rates that are used currently for charging and paying interest across the tax system.

Continuing with the example of interest on late paid income tax, the current rate since January 2008 is 7.5%, prompted by the reduction in the Bank of England (BoE) base rate in December 2007 to 5.5% and a corresponding reduction in the “Reference Rate” to 5%.  Although the base rate has fallen twice since then, to 5.25% in February and to 5% in April, and all six banks reduced their basic lending rates accordingly, the statutory formula still results in the same 7.5% interest rate on late paid income tax. This is because, where the “Basic Rate” is 5.25% or 5%, the “Reference Rate” stays unchanged at 5%.

Although the rounding rules for interest rates mean less frequent changes and provide a degree of stability in the rates, some taxpayers have been unhappy when the changes made by the BoE are not reflected in the rates applied under the relevant legislation on late payments and overpayments.  Taxpayers have found it confusing that interest rates charged (and applied to overpayments) do not move in line with the BoE bank rate.  The rounding rules make it difficult to predict when changes will take place and the infrequency of the changes means that the level of recompense does not keep pace with changes to commercial rates.

Proposals
The aspects of the current arrangements for which change is considered in the consultation document are

• the most appropriate starting point for the calculation formulae
• whether there should be a single interest rate instead of eight
• what the differential should be between late payment rates and overpayment rates
• the frequency at which the rates change
• whether simple or compound interest should be paid
• the special situation of employer payments of in-year PAYE tax.

Four optional starting points for the interest rate formulae are considered, namely,

• the “Reference Rate”, as used currently
• the BoE base rate
• the London Inter-Bank Offered Rate (LIBOR)
• the Government bond rate.

The consultation seeks views on which of these starting points would be the most appropriate to use and most readily understood by taxpayers.  Although the document does not specify a preference, the pros and cons appear to indicate a preference for the BoE base rate.

The use of a single interest rate in place of the current eight rates is proposed.  However, it is suggested that separate rates for late payment and for overpayments should be retained, but with the differential set to reflect the differences in interest rates used for borrowing and lending.

The key issue with regard to the frequency of change is whether it would be more acceptable to taxpayers for interest rates to be stable, which might indicate an annual review of rates, or for rates to be sensitive to bank interest rates, which would suggest more frequent review points.  A compromise is suggested, with reviews taking place every three or six months.

HMRC currently charges and pays simple interest but is open to arguments that an element of compound interest should be introduced, as long as the rules and the rates are clear and not open to interpretation.
The issues arising for monthly and quarterly payments of PAYE tax collected by employers are the same as those discussed in the current consultation document on penalties for late filing and late payments.  As employers only report their exact liabilities after the end of a tax year, it is not currently possible for HMRC to determine whether an employer has underpaid or even overpaid PAYE tax at any point in that tax year.  The same three options are considered as are suggested in the “penalties” consultation document, namely,

1. requiring employers to provide a monthly statement of PAYE liability, allowing interest for late payment to be calculated accurately each month.
2. extending the statutory late payment surcharge arrangements for large employers to medium-sized employers, i.e. those with between 50 and 250 employees.  This approach would require a new way of calculating interest and it is suggested that interest could be calculated on the number of days that each payment is late.  However, that raises the problem of months in which no payment is made, as there would be no figure on which to calculate the interest.
3. HMRC estimating the tax due each month and basing the interest charge for the late payment on that estimate.

All three options would involve significant changes for employers and HMRC is interested in views on these and any other ways in which interest could be charged on last payments of in-year PAYE.

The consultation document is available at the link given below.  Comments should be received by 11 September 2008.

Further information:
Interest – Working Towards a Harmonised Regime  http://customs.hmrc.gov.uk/channelsPortalWebApp/
downloadFile?contentID=HMCE_PROD1_028672

Double Taxation Conventions

New Convention signed by UK and France

A new comprehensive Double Taxation Convention between the United Kingdom and France was signed in London on 19 June 2008.  The Convention will enter into force once both countries have completed their Parliamentary procedures and it will replace the existing Convention which dates from 1968.

A new Convention with France was originally signed on 28 January 2004 by both parties. Changes to the tax systems in both countries since then meant that that Convention could not be taken forward and it has been replaced by this new Convention, which incorporates additional improvements over the 2004 text.

Further information:
Double Taxation Convention: France  http://nds.coi.gov.uk/content/detail.asp?ReleaseID=371334&NewsAreaID=2

Scottish Agricultural Wages Board

Consultation on continued need for minimum wages for agricultural workers in Scotland

Wage-fixing machinery in the agricultural industry in Scotland has been in place in various forms since 1917.  The Agricultural Wages (Scotland) Act 1949 consolidated the regulatory Acts of 1937 and 1940 and provided for the establishment of the Scottish Agricultural Wages Board (SAWB). Under the 1949 Act and its subsequent amendments, the Scottish Agricultural Wages Board is empowered to make Orders fixing minimum wage rates, holiday entitlement and other conditions of service for agricultural workers in Scotland.  However, UK legislation does not permit the Wages Board to agree minimum rates of pay that are below the National Minimum Wage.

Similar arrangements for determining minimum rates of pay and other conditions for agricultural workers exist in England and Wales, and in Northern Ireland under different legislation.

The expression "agricultural workers" covers agriculture and horticulture including market gardens, gardens and nursery grounds, but excluding private or ornamental gardens from which no more than a small amount of product is sold.  It also applies to foresters and workers in certain types of fish farming.

The SAWB is an autonomous body comprising:

• five independent members appointed by Scottish Ministers,
• six members representing the interests of employers, five nominated by the NFU Scotland and one nominated by the Scottish Rural Property and Business Association, and
• six members representing the interests of workers, nominated by Unite the Union (formerly the Transport and General Workers' Union).

The consultation document does not indicate any preference for the future of the Wages Board.  Rather, it seeks views on whether special arrangements should continue to apply to agricultural workers and, if so, what terms and conditions should continue to be covered by the Wages Orders.  It also asks whether, instead of retaining the SAWB, it would be better to replace it by a panel with advisory powers only, or to treat agricultural workers in the same way as all other workers.

The consultation document is available at the link given below.  Comments should be received by 30 September 2008.

Further information:
Scottish Agricultural Wages Board  http://www.scotland.gov.uk/News/Releases/2008/06/20102001

Payroll deadlines during the next month

July 5 – This is the final day of tax month 3.  Tax and NICs etc for payments made in the tax month to July 5, or in the tax quarter to July 5, are due for payment to the Accounts Office by July 19, or by July 22 if paid electronically.

July 6 – This is the deadline date for filing, in paper form or electronically,

• form P9D Expenses payments and income from which tax cannot be deducted
• form P11D Expenses and Benefits
• form P11D(b) Return of Class 1A National Insurance contributions due and Return of expenses and benefits – Employer’s declaration

Copies of forms P9D and P11D must also be given to the employees concerned by this date.

July 18 – (July 19 is a Saturday) – This is the deadline for payment of tax and NICs to the Accounts Office, for tax month 3 by employers who pay monthly, for tax months 1 to 3 by employers who pay quarterly, unless they make their payments electronically.

July 18 – (July 19 is a Saturday) – This is the deadline for payment of Class 1A NICs to the Accounts Office in respect of benefits in kind reported by employers on forms P11D for the 2004/05 tax year, unless they make their payments electronically.

July 22 – For employers who pay their tax and NICs to the Accounts Office electronically, this is the deadline for electronic payments, including payments of Class 1A NICs to be cleared into the HMRC bank account.  Payments through BACS must be initiated by July 20 at the latest.

Payroll FAQ's

Fixed-Term Employees

Are temporary staff entitled to redundancy pay when they complete their contracts?

Under the provisions of the Fixed-term Employees (Prevention of Less Favourable Treatment) Regulations 2002, employees engaged under fixed-term contracts may not be treated less favourably than comparable permanent employees on the grounds that they are fixed-term employees, unless that treatment can be justified objectively.

The Regulations apply only to employees; agency staff are specifically excluded.
If an employee is dismissed or selected for redundancy simply because of working under a fixed-term contract, the action is likely to be less favourable, or detrimental, treatment.  Consequently, at the time the 2002 Regulations came into force, the redundancy provisions set out in the Employment Rights Act 1996 (ERA) were amended to provide that, in certain circumstances, a fixed-term employee would be treated as being dismissed by reason of redundancy.

For the purposes of redundancy rights, the ERA uses the term “limited-term contract” instead of “fixed-term contract”.  A “limited-term contract” is a contract that is intended to come to an end when a “limiting event” occurs.  It is not, therefore, simply a contract for a pre-determined period of time.  It is also a contract that ends when a task or project is completed, or when an event of any kind occurs or fails to occur, e.g. the return of a woman from maternity leave, or the end of a period of peak trading or production.

What, then, is an employee’s situation when the “limiting event” occurs?  Section 136 of the ERA says that the employee is “dismissed by the employer if … he is employed under a limited-term contract and that contract terminates by virtue of the limiting event without being renewed under the same contract”.  The employee is dismissed, therefore, if the contract is not renewed.  The reason why the contract is not renewed then becomes important.  According to section 139 of the ERA, if the contract is not renewed because the need for employees to carry out work of a particular kind has ceased or diminished, the dismissal is by reason of redundancy.

Consequently, if a limited-term employee’s contract is not extended or renewed, and the reason is that there is no longer a requirement for the work done by the employee, it amounts to a dismissal by reason of redundancy.  There is entitlement to all redundancy rights, including redundancy pay, if the employee has the necessary length of service.

This does not mean, however, that there is a redundancy situation every time a fixed-term employee’s contract ends.  For example, if an employee is covering for an absent permanent employee, e.g. a woman on maternity leave, the reason for the contract ending is not by reason of redundancy.  The need for someone to perform that kind of work has not ceased or diminished.

Another important issue is the requirement for an employer to consult if 20 or more employees are to be made redundant over a period of 90 days or less.  If the employment of a large group of temporary seasonal workers is to end at Christmas, the dismissals are only treated as being by reason of redundancy for consultancy purposes if, according to section 195 of the Trade Union and Labour Relations (Consolidation) Act 1992, the dismissals are “for a reason not related to the individual concerned”.  The failure to renew their contracts amounts to dismissal, the reason is redundancy because the need for their work has ceased, but it is not the kind of redundancy that requires consultation.

The objective of the Fixed-term Employees Regulations is to ensure that fixed-term employees have the same or equivalent terms and conditions as permanent employees doing the same jobs – unless the difference can be objectively justified.  This means that a fixed-term employee would also be entitled to the benefit of any contractual redundancy provisions, at the same levels that apply to permanent employees, unless the employer can objectively justify different treatment.

Prior to October 2002, employees were able to waive their right to redundancy pay if they were engaged under fixed-term contracts for two years or more.  That concession was removed completely from 1 October 2002.  However, such a waiver clause in a contract that was made before 1 October 2002 continues in force until the contract is either renewed or extended, at which time no further waiver is permitted. 

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