Can late filing penalties apply to returns filed early?
By Justine Riccomini, Head of Tax (Employment and Devolved taxes)
29 September 2022
Find out what happened when an employer filing early PAYE returns received a late filing penalty
In the summer of 2022 the case of Quayviews Limited v HMRC served as an interesting reminder that instead of catching a worm, the early bird can instead receive a late filing penalty.
How early is “early”?
By way of background, the employer in question reacted to a previous reprimand from HMRC for late filing its RTI returns by batch-filing its RTI returns for 2020-21 in a single submission, three months in advance. The guidance says that RTI must be completed “on or before the payment date”, but fails to define how far in advance “before” is.
Readers may wonder how an employer might be able to calculate payroll so far in advance of payday, but it if the employer knows what the pay figures are going to be for future pay periods and has up to date tax codes, it is reasonable to assume they can carry out the calculations well in advance. However, in this case, the early batch filing threw up problems with the HMRC computer systems. The employer received a note to say the submissions had been sent successfully, but it appears they were not processed correctly once received. As a result, we now know that it is not in fact possible to make early RTI returns earlier than the beginning of the particular tax month to which the pay relates.
What happened next
The employer received three £100 late filing penalties and HMRC denied having received the returns – a stance which they changed at the Tribunal hearing. However, HMRC stood their ground that the returns had been received ‘too early’ and were thus not received ‘at the right time’. HMRC denied that the employer had a “reasonable excuse” which would extinguish the penalties altogether because they had previously received (and were therefore assumed to have read) the so-called “education letter” associated with the previous incidence of late filing penalties, which demonstrates how to file an RTI return correctly.
It was therefore for the First-tier Tribunal (FTT) to establish whether the employer had acted reasonably, and whether the employer had a sufficient degree of ignorance to be unaware that early filing was not permitted.
The Tribunal’s deliberations
The FTT reviewed the education letter, as well as other correspondence, and determined that there was nothing in any of the correspondence which clearly explained early filing such as this employer had carried out was not acceptable. The guidance is clear on the latest accepted date of submission, but not clear on the earliest date, stating only that returns must be submitted “on or before the payment date”, except in the case of making an RTI submission in one tax year that belongs in the next tax year, which is prohibited. The FTT therefore concluded that ‘HMRC’s own guidance would indicate to a reasonable taxpayer that it is possible to file returns early’.
Reasonable excuse: upheld
The Tribunal decided that the lack of clear guidance, together with the mixed-up notion that a successful submission is only successful because it has been received by HMRC but not been processed, was sufficient to uphold the grounds of reasonable excuse by the employer, and thus the penalties were dismissed.
Inconsistent wording – the twist in the tale
There are in fact two different references to when RTI returns must be submitted. One is the well-known “on or before the payment date” in legislation and guidance, which most employment tax and payroll professionals are very familiar with.The other, less well-known reference is in terms of application of penalties, which is not in guidance (other than in the Compliance Handbook at CH62820) but in legislation at Finance Act 2009, Schedule 55 Para 6C.
The wording “If P fails during a tax month to make a return on or before the filing date, P is liable to a penalty under this paragraph in respect of that month” – appears to infer that a return can be made during any tax month which precedes the payment date.
This might mean that, in fact, the question of reasonable excuse was not even in point.
Conclusion
Apart from wondering how this case got as far as the FTT, there has to be concern around the HMRC internal processes and the initial denial that the returns had even been received. Why was the education letter not sufficiently well worded so as to eliminate any possible areas for misunderstanding? And why did HMRC not consider the wording of its own legislative provisions and guidance before proceeding to the Tribunal?
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