More easy pickings?

John T Newth FCA, FTII, FIIT, ATT discusses the new P35 filing obligations.

SELF ASSESSMENT BY means of personal income tax returns must be deemed to be very successful by the Government and the Inland Revenue. Not only has it passed over the tax assessment and collection functions from the Revenue to taxpayers, but more tax has been brought in and much earlier. Added to this are the penalty and interest provisions and it is a well-known fact that £millions have been imposed each year in this respect and are a windfall to the Government.

It now appears that, on a lesser scale, the Revenue may have produced yet another licence to print easy money for the Government, following changes to the employers' P35 obligations.

Online filing

I will only mention this aspect of the P35 system in passing, as it is not the main thrust of the article. However, there are now two online systems relating to the electronic filing of forms P35, commencing with year 2004-05.

Larger businesses

Businesses with 250 employees or more at the end of October 2003 are obliged to file on line for 2004-05 and subsequent years. Penalties will be imposed if such an employer files in hard copy form.

It remains to be seen how this procedure works out in practice. One important point for employers to note is the extended filing date of the 22nd of the month. It must be stressed that the Revenue must receive value before that day, so that if that date falls at a weekend or on a Bank Holiday, funds must be remitted in advance.

Smaller businesses

Smaller businesses may file electronically on a voluntary basis and, if they intend to do so, should have registered for 2004-05 by now.

In the case of employers with less than 50 employees, there is a financial incentive to file in this manner. A cash incentive of £250 is due this year and additional payments will be made during the next few years making the total £825. The reason given by the Revenue for this incentive is that smaller businesses can invest the money received in new software.

Two points should be noted in respect of the incentive payments. The first is that the cash payments cannot apply to a one-director company where no remuneration is paid. Conversely, it appeared initially that a group of companies owned by one director could each pay the director £50 and collect the incentive payment. That obvious loophole has already been closed by the publication of The Income Tax (Incentive Payments for Voluntary Electronic Communication of PAYE Returns) (Amendment) Regulations 2005 (SI 2005/826) on 19 March 2005. In a sign of the times, the Revenue has felt it necessary to publish anti-avoidance regulations to counter 'artificial arrangements' before the online filing incentive could even be exploited.

Quality standard

This article relates chiefly to a quality standard that the Revenue has introduced in respect of the filing of forms P35 and P14 for the year 2004-05 and subsequent years.

Details of this standard are shown on page 2 of Revenue booklet E10 Finishing the year up to 5 April 2005 . Somewhat confusingly, it is also mentioned to a lesser extent in the Employers' Bulletin 19 , February 2005 at the section 'end of year 2005 — countdown to 19 May'. The cover sheet that comes with hard copy forms P14 ordered from the Revenue employers' orderline also refers to the quality standard.

The legal mandate for the introduction of this standard is supposed to stem from TMA 1970, s 113 which states 'any returns — shall be in such form as the Board may prescribe'.

In the case of electronic filing of forms P35 and P14, there may not be much of a problem as the relevant software is designed to take into account the quality standard.

The problem arises for the very many small businesses that will continue to submit hard copy P35s and P14s for 2004-05. Booklet E10 states that hard copy returns will be rejected on the following grounds:

• The stationery used has not been approved by the Revenue

• The form P35 is not signed.

• The form P35 has not been fully completed.

• The form P35 has not been enclosed.

• The forms P14 are not the correct version for the year.

• The forms P14 are not enclosed with the form.

• There is not enclosed a form P14 for every employee listed on the form P35.

• The forms P14 do not have a valid entry in either the National Insurance number box ( i.e. not 'TN' numbers) or the date of birth and gender boxes. Temporary NI numbers on forms P14 are not acceptable.

• The forms P14 do not all have an entry in the employee name box.

• The NIC boxes on the form P14 are not fully completed.

• The entries on forms P14 are unclear. The entries should not therefore be faint, should fall within the white boxes, the carbon should not be smudged, the font size of the print should not be too small (but the Revenue has not specified what constitutes a small font size), the form should not have been hole-punched where entries were made or the forms otherwise damaged.

• The forms P14 have not been split correctly.

• The forms P14 are attached together with either glue or staples.

• Sticky labels or correcting fluid have been used on forms P14.

• The sprockets have not been taken off the forms P14.

The Revenue will reject forms P35 and P14 that are not perfect according to the quality standard and these will be returned to the employer, who must then resubmit them correctly. This is confirmed by the online press release entitled 'Do it online' of 15 March 2005, which completely ignores the potential penalty position. This press release also states that employers who file online will get an on-screen message telling then what is wrong and if they file via electronic data interchange then an e-mail will be sent. Such employers have the opportunity to put matters right by 19 May 2005.

The Revenue states that if the forms P35 and P14 have been submitted in hard copy form, the returns will be sent back informing the employer what is wrong and it will then be the employer's duty to re-submit the form by 19 May. More tellingly, the press release states later 'although some of our quality checks are done immediately, we will be doing others later'.

The reality must be that it is most unlikely that Revenue personnel will check hard copy forms P35 and P14 until after 19 May 2005. Any small imperfection in the returns will then mean that the return is sent back and the employer will be subject to a late filing penalty of £100 per 50 employees (or part) per month up to a maximum of 12 months under TMA 1970, s 98A(2)(3) .

Tax practitioners who complete end-of-year employee returns on behalf of their clients need to follow the quality standard instructions very carefully, as any errors could bring them into professional negligence problems. More importantly, other clients should be informed, even at this very late stage, of the obligation to submit perfect returns, on pain of tax penalties. In essence, the list of instructions in Booklet E10 is akin to impossible conditions which, if not fulfilled, will produce a tax penalty.

A cynical view is that this is the imposition of yet another 'stealth' tax, which will undoubtedly be a money-spinner for the Government. As these instructions currently stand, they represent the most extraordinary statements from the Revenue that the writer has observed during many years in taxation. However, a development referred to below could conceivably bring some relaxation to these impossible standards.

Supplementary pages

Many employers have been in the habit of submitting supplementary paper forms P35 in the past. These have often related to directors' forms P14. Where hard copy forms P35 are submitted for year 2004-05 and future years, it should be noted that supplementary forms P35 are unlikely to be accepted by the Revenue.

The first paper form P35 that is submitted by the employer will be assumed by the Revenue to be the only and complete return. If a subsequent supplementary return is then submitted, whether before, on or after 19 May 2005, the Revenue will assume that the original return was incomplete or incorrect. Accordingly, this will be treated as negligent conduct, and a penalty will be imposed on those grounds. Under TMA 1970, s 98A(4), this is a mitigable amount of up to the PAYE tax due for the year.

This application of current legislation by the Revenue is open to question, but practitioners and their clients who submit supplementary returns on a hard copy basis should be prepared to defend themselves before the Commissioners from now on.

Where employers file electronically, however, it is permissible to submit the form P35 in parts, provided at least one of those parts is filed electronically. Where at least one part is filed in this way, the return is not treated as 'made' until all the parts have been received by the Revenue. The electronic part has to fulfil the quality standard test applied to electronic returns.

For example, the main payroll could be submitted electronically on form P35, with the directors' forms P14 as a separate part on hard copy. Additional stationery, such as the P14 cover sheet, will be needed from the Revenue employer's orderline in such cases. However, in the case of small employers, it should be noted that if the online return is submitted in parts, which include some hard copy elements, then the cash incentive of £250 for 2004-05 would not be due since the entire return was not filed electronically.

Conclusion

It seems likely that there will be substantial problems connected with filing of forms P35 and P14 for 2004-05. Electronic filing online is a sensible move, but any such major change of procedure is likely to produce its problems.

Of much more importance to many will be the situation regarding the continuing filing of forms P35 and P14 on a hard copy basis. Many employers, and their advisers, will be unaware of the strict quality standards set out in Revenue booklet E10. There is therefore the potential for massive late filing penalties in connection with what is a PAYE version of self assessment.

Fortunately, the employment taxes committee of the Faculty of Taxation of the ICAEW has acted decisively with the publication of Tax Rep 14.05, entitled 'Penalties for employees who file P35s/P14s on paper', on 15 March 2005. This consultation paper contains some very strong representations about the issues referred to in this article.

Stop press

Indeed, since this article was originally drafted, the subject of 2004-05 P35 returns has been almost continually in the news, both on the Revenue and professional institutes' websites. It is clear that the Revenue is already suffering online filing problems, with delays and the secure mailbox closed until 9 April 2005. The department blames initial teething problems, but has extended the scope of Extra-statutory Concession ESC B46 so that seven days' grace will be given for the filing of 2004-05 P35s, include online returns. This means that the final filing date in all instances is now 26 May 2005.

The situation has also provoked the early publication of an article entitled 'Sending employer's annual returns for 2004-05', which will form part of the next published Tax Bulletin , and is reported in the Update section of this magazine.

Issue: 4003 / Categories: Comment & Analysis