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Merlin gets published!

This is a copy of an article we had published in the first ever issue of Doncaster Business & Leisure magazine (Jan 2010). The article itself is useful to you as a fellow business owner:

Robbing Peter to pay Paul?

When cash flow is tight and you have a critical bill to pay, to ensure day-to-day operation of your business, it’s likely you may defer paying some other financial commitment to settle this.  And who can be one of the most common “Peters” in this situation? Probably H M Revenue & Customs (HMRC), in particular the payment of deductions made from salaries and sub-contractors under the PAYE scheme for Income Tax, CIS and National Insurance.

Of all the monthly creditors that you possess, HMRC have traditionally been perceived as one of the least aggressive in pursuing you for settlement where PAYE, CIS and National Insurance were concerned. Unlike VAT or other taxes, you may not have been penalised for late payment, though there has been an option for HMRC to charge interest on late payments. Past experience suggests that this appeared to have been rarely enforced.

Things however are changing, and the worm has turned.

What’s changed?

From 6 April 2010 “Peter” (HMRC) will no longer be the meek and mild second choice creditor, where PAYE scheme deductions are concerned.  If you are tempted to defer paying this monthly (or quarterly) bill you should reconsider this as HMRC have introduced a strict penalty regime designed to “encourage” businesses to pay on time.

From tax year 2010-11 HMRC intend to implement the new late payment penalties for PAYE payments, including Income Tax/NICs . . .  This means that from May 2010 you may have to pay a late payment penalty if you do not pay the PAYE due each month or quarter, on time and in full. There will also be late payment penalties for not paying amounts due annually . . .

The new late payment penalties will apply to all employers, not just the large ones.
H M Revenue & Customs

So, just how much will these penalties be? Well, in their desire to appear fair, if you are overdue just once in the tax year, they will graciously waive this charge (provided you are less than 6 months behind with that one late payment!).  Should you become a habitual late payer (for habitual read ‘late more than once per tax year’) you will be charged a penalty geared to the amount due, calculated at 1%, and increasing on a scale to 4% of the liability each month if you are repeatedly late.  Do bear in mind that these are penalties; interest will also be charged in accordance with HMRC’s published rates.

The penalties do not stop there.  Leave a single amount unpaid for more than 6 months and a penalty of 5% is incurred. Should you fail to settle this for a further 6 months another 5% penalty is levied.

Talking in percentages, especially small figures, can disguise the true cost of non compliance, so lets look at an example;

You have a PAYE bill for 5 May 2010 of £2,500 but missed the payment deadline by a few days – no problem, your card is marked but there’s no penalty.  The liabilities for 5 June and 5 July you pay on time, but then you are on holiday when the 5 August payment was due! Now you are penalised, at 1% of what you owed (so on £2,500 that is a bill for £25).

The next month, 5 September (aka “silly season”), comes and goes and you simply overlook making payment, but for the rest of the tax year you pay on time. So long as you pay up by 19 March 2011 you will only incur a 1% penalty (as this would be the third late payment in the tax year); leave it until you do the payroll year end and the penalty is 5%.

Using Income Tax and National Insurance deductions as a means of bridging your cash flow shortfalls, without even bothering to consult with HMRC, is no longer going to be a cost effective option.

You may be able to mitigate penalties in certain circumstances, but you should talk to HMRC’s business payment support service as soon as you realise you are going to have difficulty with making a payment.

What can I do?

So is there anything you can do to avoid finding yourself in this situation?  Ultimately making the payment on time is down to you.  Employing the services of an Accountant (or a payroll bureau) ensures you pay not only the correct amount, but are also informed of the relevant payment deadline, for PAYE scheme deductions.

Robbing Peter to pay Paul?  Not now Peter’s armed and dangerous!


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