Source – Accounting Web

The case of Quayviews Ltd vs HMRC highlights the surprising fact that a late filing penalty can apply when an employer files its RTI returns too early.

Payroll professionals are fully aware of the real time information (RTI) deadlines for filing the full payment submission (FPS). All gov.uk guidance, for example “When to send your FPS” says that this must be “on or before your employees’ payday”. Even the legislation (Regulation 67B of The Income Tax (Pay As You Earn) Regulations 2003, inserted via 2012 Amendment Regulations), says that the FPS must be submitted “on or before making a relevant payment”.

Late filing penalty

Where an employer does not file “on or before”, Schedule 55 of Finance Act 2009 allows for HMRC to impose a penalty, increasing depending on the number of employees on the PAYE scheme. There are penalty exemptions such as late filing but within three days. This three-day exemption, however, may not apply where an employer files late regularly, the consequence being “contact” and “consideration” for a penalty.

This all sounds perfectly straightforward – until you come to the surprising case of Quayviews Limited vs HMRC. The appeal [TC8515] concerned HMRC’s issue of three £100 late payment penalties – for filing early!

Batch submissions

Quayviews was issued late filing penalties previously so, on 4 September 2020 they decided to batch file submissions for the tax months ending 5 November 2020, 5 December 2020, 5 January 2021 and 5 April 2021. In other words, they filed for tax months 7, 8, 9 and 12 but submitted them in tax month 5. HMRC’s Basic PAYE Tools software allowed early filing, overriding a previous restriction that would not send the return if it was three weeks ahead of payday. HMRC’s software gave the employer a success message – and the definition of the word success is that something has been achieved.

HMRC issued a late filing penalty for tax months 7, 8 and 9 (but were not able to explain why one was not issued for month 12). Although it acknowledged the returns had been received, HMRC’s national insurance and PAYE Service (NPS) is unable to allocate the FPS to a specific tax month. Therefore, their reasoning for issuing the penalties was that no returns were filed within the relevant tax month.

So, even though the FPSs were certainly filed on or before payday, no filing within a tax month indicated late filing. HMRC did not consider that Quayviews had a “reasonable excuse”, hence the reason for the penalty notices. 

Reasonable excuse defence

Tribunal judge Anne Fairpo overruled HMRC’s decision, agreeing with the definition of reasonable in the case of The Clean Car Co Ltd vs C&E Commissioners [1991] VATTR 234, as reported by AccountingWeb in 2017. “One must ask oneself: was what the taxpayer did a reasonable thing for a responsible trader conscious of and intending to comply with his obligations regarding tax, but having the experience and other relevant attributes of the taxpayer and placed in the situation that the taxpayer found himself at the relevant time, a reasonable thing to do?”

In short, HMRC’s guidance did not refer to the fact that filing early and not within the tax month could constitute late filing and Quayviews did have a reasonable excuse for the following reasons:

• Guidance and HMRC themselves said only that the FPS must be filed “on or before”
• Although Quayviews had been sent a previous “education letter” by HMRC, that did not say the FPS could not be submitted in advance of the payday – indeed, guidance indicates that it can
• HMRC’s Basic PAYE Tools allows files to be submitted early without an indication that early could mean too early
• The fact that the HMRC Basic PAYE software gave a success message only means that the submission has been received.

Lesson for employers

It is, perhaps, a surprise to learn that there is such a thing as filing too early and this case demonstrates that an employer acting in good faith and reasonably can fall foul of complicated and conflicting information. 

Employers should be aware that a filing penalty occurs when either:

• The FPS is sent late, that is not on or before payday (called late filing)

or

• HMRC does not receive the FPSs that they expected to receive (called non-filing). Non-filing is where HMRC does not receive the FPS within the tax month, that is between the 6th of one calendar month and the 5th of the next.

This information is not transparent but is hidden away in the legislation and guidance, for example, HMRC’s PAYE Manual (PAYE5065). However, the case also highlights the RTI issues continue, not least the fact that HMRC’s own system will only allocate the FPS to the correct tax month if it is filed within that tax month.

Filing too early

HMRC has the right to appeal this ruling. However, the conclusion of the judgment read that HMRC’s guidance, education letters to employers and their own software should be updated to make it clear that “on or before” is incorrect – there is such a thing as filing too early. 

I would say that any appeal would expose these RTI flaws even further. “On or before” and the imposition of penalties needs to be read in conjunction with the legislation (Schedule 55, 6C) which says that, subject to two exemptions only, an employer is liable to a penalty if the FPS is not filed “during a tax month”.