If you`re an employer in the UK, it`s essential to understand the consequences of not complying with your Pay As You Earn (PAYE) settlement agreement. PAYE is the system used by HM Revenue and Customs (HMRC) to collect Income Tax and National Insurance Contributions (NIC) from employees` pay before they receive it.
A PAYE settlement agreement (PSA) is an arrangement between an employer and HMRC that enables the employer to settle the tax liability on certain expenses and benefits provided to their employees. Employers can apply for a PSA to cover minor or irregular expenses and benefits that are not part of employees` regular pay. The arrangement simplifies the administration of these expenses and benefits, including taxation and National Insurance contributions.
However, incorrect reporting of expenses and benefits can lead to penalties from HMRC. Here`s what you need to know about penalties for incorrect PAYE settlement agreements:
1. Late filing penalty
If you fail to file your PSA return with HMRC by the deadline, you may face a late filing penalty of £100 for each month or part month the return is late, up to a maximum of £1,600. The deadline for filing a PSA return is 31 October after the end of the tax year.
2. Inaccurate return penalty
If you submit an inaccurate PSA return, you may face a penalty of up to 100% of the tax and NIC due on the return. HMRC may issue this penalty if they find any errors or discrepancies in your PSA return. It`s crucial to ensure that your PSA return is accurate and reflects the expenses and benefits provided to your employees.
3. Interest and surcharges
If you fail to pay the tax and NIC due on your PSA return by the deadline, you may face interest and surcharges on the late payment. HMRC charges interest on late payments at a rate of 2.6%. Surcharges are an additional penalty that HMRC may impose if you fail to pay the tax and NIC due on time. The surcharge is 1% of the unpaid amount for each month or part month the amount remains unpaid, up to a maximum of 12%.
4. Criminal prosecution
In severe cases, HMRC may pursue criminal prosecution against an employer who fails to comply with their PAYE settlement agreement. Criminal prosecution may result in fines, a criminal record, and even imprisonment in extreme cases.
In conclusion, it`s vital to comply with your PAYE settlement agreement to avoid facing any penalties. Ensure that you file your PSA return accurately and on time and pay any tax and NIC due by the deadline. Failure to do so can result in severe financial penalties and even criminal prosecution. As an employer, you must stay up-to-date with HMRC`s rules and regulations to ensure that you comply with all requirements and avoid any legal issues.