Tax penalties can involve interest charges for late payment. We have detailed the potential interest charges for Income Tax, Capital Gains Tax, PAYE, National Insurance, Corporation Tax and VAT for your reference below.
Income and Capital Gains Tax
A penalty of 5% of the Income and CGT unpaid more than 30 days after the due date of tax payable under self-assessment (SA) for a particular year. For example, the SA return year 2016/17, tax due by 31 January 2018 and 2017/18 by 31 January 2019.
There is a further penalty of 5% for tax remaining unpaid six months after the normal filing date of the return.
An additional 5% (as well as the two previous 5% penalties) is due if the tax remains unpaid after twelve months.
PAYE and NI
Following the introduction of real time information (RTI) for PAYE the rules regarding interest for PAYE and NI have changed.
Interest is payable on PAYE tax and NI that is paid late by employers, starting from 14 days after the end of the relevant tax year (i.e. from 19 April, or 22 April where payments are made electronically). The interest rate applying is the same as for personal SA liabilities, see above.
Interest can be charged within the tax year if any payment of PAYE tax and NI due for a tax month is paid late, e.g. interest is charged from 19th of the relevant month for cheque payments and 22nd for electronic payments.
Class 1A NI charges will attract interest if not paid by 19 July (22 July if paid electronically).
The dates for Class 1B NI are 19 October if paid by cheque or 22 October if paid electronically and interest will be charged if not paid by the due date. Class 1B applies to PAYE Settlement Arrangements (PSAs).
The interest rate applying to late paid PAYE, Class 1A and Class 1B is the same as for SA.
For 2014/15 and later years late payment penalties are only charged in respect of serious and persistent failures. However, from April 2015 late payment penalty notices will be issued automatically each quarter in July, October, January and April. They will show the penalty due for each tax month. The amount of the penalty will depend on how much PAYE is late and how many times payments are late in a tax year, e.g. if the number of defaults is one to three the penalty percentage is 1% of the late PAYE, four to six the percentage is 2%, seven to nine it is 3% and ten or more, 4%.
There is mitigation for a first failure or if in default only once (unless overdue more than six months).
If payment is not made after six months an additional 5% penalty will be charged. A further 5% will be charged if payment is still not made after twelve months. These (5%) penalties are in addition to the penalties due for late monthly (or quarterly) payments.
For late payment of Class 1A NI and Class 1B NI a 5% penalty will be due if payment is not made within 30 days of the due date. Further 5% charges at six months and twelve months will also apply.
We have created several posts surrounding Tax Penalties for further reading here.
For small and medium-sized companies interest is charged or paid on underpaid or overpaid tax from the due date at base plus 2.5% and base minus 1% respectively. But if tax is overpaid, credit interest runs at 0.5%, even if the formula produces a lower percentage.
For large companies in the quarterly payments regime, interest accrues on underpaid and overpaid tax from each instalment date. Interest charged (debit interest) is at base plus 1%, and paid (credit interest) at base minus 0.25% (however, HMRC pays at 0.5%) up to the nine-month due date for payment of tax. Thereafter the rates change to base plus 2.5% and base minus 1% respectively apply (again, HMRC pays at 0.5%).
Note. Unlike personal tax, interest on overdue or overpaid tax is deductible and taxable respectively.
Interest is charged on VAT paid later than the due date (which is usually the same date as the deadline for the return).
Where either a return is made late or tax is paid late (first default), HMRC is empowered to serve notice that the following year is to be a surcharge period. If any return or payment in the surcharge period is made late (second default), an automatic surcharge of 2% of the tax due is made.
For the third default, the surcharge percentage is increased to 5%, for the fourth default to 10% and, for the fifth or subsequent default, to 15%. Each default in the surcharge period results in the period being extended. This includes late filing of returns. For the first two defaults, surcharge assessments for amounts less than £400 are not issued. There is a parallel default surcharge regime that operates where payments on account are not made within the period where they are due.
For businesses with a turnover less than £150,000 there is an additional twelve months after the initial twelve months for which no surcharge is made, in this event for the second default. Thereafter the surcharges of 2%, 5%,10%,15% apply for the third, fourth, fifth and sixth defaults respectively (no surcharge assessments for less than £400 in respect of third and fourth defaults).
For more information, we provide a Business Consultation to ensure our clients benefits from tax planning and accounting matters.