HMRC change P35 penalty process

  • By Mark Morton
  • 04/04/2012

So finally HMRC have seen sense. After numerous Tribunal cases questioning the validity of P35 penalty notices, HMRC intend to change their end of year procedure.

The main focus in these cases has been the late issuing of penalties, often when they have reached £400 or £800, as opposed to telling people they have a problem shortly after the initial failure to file in May.

The case of Hok (although under appeal by HMRC) reduced the penalty to a basic £100 as the Tribunal found, based on common law, that the State was not acting fairly by delaying the issue of these penalties. Whilst HMRC seem loathe to accept the point, they have now issued the following statement:

'The joint initiative between HM Revenue & Customs (HMRC), the professional bodies and tax charities, launched in late 2011, set a number of service objectives for delivery during 2012.

One of these was to work together to address concerns about the delay in informing employers that their PAYE end-of-year returns are late, and therefore subject to penalties.

The background to this issue is that where employers do not file their annual P35 return by 19 May, they incur penalties of £100 per 50 (or fewer) employees for every month (or part month) that their return is late.

In some cases, employers were unaware their returns were late until they received a first penalty letter in September covering four months' worth of accrued penalties.

We can now announce a number of agreed measures to deal with this problem.

To help employers comply with their obligations, HMRC will:

  • Change the date when we issue the 'Notification to complete form P35 Employer Annual Return 2011/12' from mid-February to mid-March 2012, so that employers will receive it much nearer to the end of the tax year.
  • From 28 April 2012, where we believe a 2011/12 P35 remains outstanding, we will issue an 'Employer Annual Return Reminder'.
  • From 31 May 2012, we will introduce a 'P35 Interim Penalty Letter' which will be issued over a five-day period, so that it reaches employers within a month of the filing deadline. The letter will state that the employer has incurred a late return penalty and explain what to do to avoid it increasing. We have worked together with the professional bodies on the content of this letter and it has been tested on employers and payroll agents to make it clear and employer -focused.
  • Improve the online guidance for submitting P35s online, including specific advice about the test-in-live service to reduce the number of employers who believe their test submission is the live submission. The on-screen messages within the HMRC online product will also make it much clearer that even when a successful test transmission has been made, a live transmission is still required. We would encourage those using commercial payroll software (where the text of test/ live messages may vary) to sign up for HMRC's email alert facility to help them avoid this problem.
  • Instruct Employer Helpline staff to tell employers about filing dates when setting up new employer schemes, to help them avoid a penalty.
  • For next year, improve the information on the P35 and the reminders to include a warning that the first penalty notice will cover 4 months.

Taken together, these measures should help employers to avoid incurring unnecessary penalties and significantly reduce the number of cases where penalties in excess of £100 are charged.'

Of course, this is a short term issue, as the implementation of RTI will get rid of P35s...to be replaced by penalties for late filing! One would hope that HMRC's new systems will be rather better than their old ones.

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