United Kingdom – Issuance of Consultative Document on RTI-Related Penalties
The U.K. government has issued a consultative document1 seeking views on the structure of late filing and late payment penalties under “Real Time Information” (RTI). The document considers how to achieve the greatest possible compliance with RTI and the basic penalties that will apply to employers who do not meet their RTI information and payment obligations in full and/or on time.
Responses to the consultation are sought by 6 September 2012. KPMG LLP (U.K.) plans to be involved in the consultation process. If clients should have concerns or questions, please feel free to send your comments to your usual KPMG contact.
Under the new RTI system, employers will provide HMRC with details of the tax, social security, and other amounts relating to each employee’s pay when or before they make the payment to the employee. The U.K. government’s plans for employers to file details of tax and social security withheld from employees in real time has been covered in detail in previous Flash International Executive Alerts: 2011-174 (25 October 2011) and 2011-064 (8 April 2011). Also, for related RTI coverage, see the following issues of Flash International Executive Alert: 2011-203 (9 December 2011) and 2011-176 (28 October 2011).
The introduction of RTI is the biggest change to PAYE since it was introduced in 1944 and it is essential that all employers fully understand and comply with their obligations to foster a successful rollout of RTI. To this end, it is key that the potential penalties for failure to comply are properly structured to encourage full compliance, and at the same time are fair and easy to understand. The consultative document states that HMRC is “… designing RTI to be as simple as possible to comply with and welcome other ideas for encouraging employers to send in the information on time.” KPMG LLP (U.K.) believes, however, it is important that HMRC considers the difficulties certain employers will face in meeting the requirement to file “on or before payment” of earnings (as penalties cannot enforce a deadline that in many instances cannot in practice be met).
The consultative document provides employers with an opportunity to help shape the government’s deliberations since the penalty model to be introduced is still very much being developed.
Draft legislation together with a summary of responses to this consultative document are expected to be issued in Autumn 2012. A “high level” summary of the main proposals is given below. The Penalties
The new late filing and late payment penalties for RTI will be issued automatically rather than manually. Penalties for filing an incorrect return, however, will be issued manually following compliance checks.
The consultation document suggests that HMRC is expecting many penalties to be issued – the consultation document states:
… The volume of returns and payments processed by HMRC means that some aspects of the penalties need to be automated rather than issued manually …
… If penalties were issued quarterly, it is likely that we would want to issue them at different times to different employers, rather than issuing them all in the same month …
… This is similar to the current VAT regime and could ease the pressure on HMRC resources by smoothing the flow of penalty work, and potentially improve HMRC response times to enquiries from employers…
One proposal is that a “default” would be triggered every time a payment is made to an employee and the relevant information is not passed to HMRC on time. The consultative document gives the example of a weekly payer having 10 employees and explains that the employer has the potential for 40 or 50 filing defaults a month dependent on whether there are four or five pay-days in the month. The document also explains that a monthly payer with 40 employees would have the potential to incur 40 filing defaults a month.
The document recognizes the difficulty and that such a system might seem unfair to employers who pay more frequently; it requests “… other ideas for encouraging employers to send in the information on time.”
As noted in the consultative document, one example of the penalty to be charged based on the number of defaults would be to charge a £100 penalty for the first band of 50 filing defaults or employees, increasing by £100 for each further band or part band of filing defaults/employees – i.e., £100 for 1 to 50 defaults, £200 for 51 to 100 defaults, etc. In this way, an employer with 45 employees would receive a £100 penalty whereas an employer who had 645 employees and missed the filing deadline would incur a penalty of £1,300.
The above examples of the number of potential filing defaults are correct if the individual is only paid on one specific pay-day. The number of potential defaults could be greater if, for example, share options are exercised on a day that is not the pay-day and the consultation also recognizes that daily filing defaults could arise. Consequently, big multinational employers may have a very high number of potential filing defaults and penalties.
The document also discusses a penalty cap as a way of stopping the penalties becoming disproportionate. The examples given for the monthly late filing penalties are £3,000 or £10,000. KPMG LLP (U.K.) believes that a cap may be essential if such a system of penalties based on the number of employees is introduced – but many employers might view a monthly cap of £10,000 as too high.
When Will Penalties Apply and When Will They Be Charged?
One suggestion is for late filing penalties not to be charged at the time when a RTI return is late. The employer could be told it has incurred a default, perhaps by an electronic alert with the penalties then being charged at the end of each quarter. The hope is that this would reduce the volume of penalty notices issued. There is also a suggestion that an employer would only get one penalty per month even if more than one report is late.
All employers should have joined RTI by October 2013 when the main rollout of the Universal Credit is expected to begin. The new late filing penalty regime will not apply before this date. The consultation document asks whether the new penalties should apply from April 2014 in order to allow employers to get used to the new system before introducing the penalty regime.
An alternative suggestion is that the introduction of penalties is staggered with the penalties applying to tranches of employers from different dates based on the size of the employer or the date they joined RTI. All employers would then be subject to RTI from 6 April 2015.
Another suggestion is not charging a late payment penalty until the amount of penalties incurred reaches £500 over a set period. The suggested periods being the tax year in question or, a 12-month rolling period, or an indefinite period.
A staggered introduction of penalties appears over-complicated and could lead to confusion. The suggestion of an easy introduction to RTI with penalties introduced at a later date appears to be sensible.
Although not charging late payment penalties until they reach a set amount is attractive, having a rolling period may be difficult to track.
RTI will include the facility to report a NIL return. This will not be compulsory, but submitting such a return will stop penalties being issued and remove the administrative burden of having to appeal.