Comments of the CIOT on the draft regulations, sent to the Inland Revenue on 5 September 2003. The Chartered Institute of Taxation is pleased to have the opportunity to comment on these draft regulations.
We start from the premise that any system should be encouraging people to file electronically/pay electronically, not forcing them to do so at the risk of penalties. We have always maintained that any system should be made so attractive that people just want to go this way - it is undoubtedly the way forward - rather than being threatened if they do not do what the authorities require. In short, the system should be carrot not stick. Therefore we think that it should be made as easy and as attractive as possible for employers to comply with the requirements of the legislation.
There is no carrot in this legislation (unlike the e-filing regulations) and we think this is regrettable. The extra three days given for payment will only be compensation to some. As discussed at the MPPCP meetings, we are not sure that it adequately gives compensation where due dates span weekends and bank holidays.
As for the ease and comprehensibility of the legislation, we have the following points:
1. We find it slightly depressing that we have the primary legislation in the Finance Act, and here is the secondary legislation, but we still await guidance/directions to complete the picture. Is it really necessary to have three layers to get to a working system?
2. Under Regulation 3, we get in effect a power for the Board to approve means of electronic payments. That effectively gives the Board a veto over methods that can be used. It strikes us as odd that the Board should, in effect, have the power to say that electronic payment method X is OK whereas electronic payment Y is not acceptable. Surely if it works that should be all that is necessary? We assume that the Revenue will say that they will in fact approve all proper methods of electronic payment (and the website note accompanying the draft regulations suggests this), but it strikes us that there is something of a principle here. Should the Board not at least have to give reasons for not accepting a method? – so, in other words, should not the regulation be in terms of the Revenue having the power to "ban" a particular method if it is shown to be invalid? Certainly it should not be possible for the Board not to accept a method just because it does not fit with their methods and systems.
3. In the new Regulation 42A, in (4)(a) there is reference to the "e-payment notice" and this, of course, is an essential part of the process, leading to the employer knowing that he has to start making e-payments. We note that the specified date for the measure of the size of the employer must be no later that 31 January preceding the year of e-payments, but there is no time limit for issue of the “e-payment notice”. Surely the employer needs to have a certain period - 3 months strikes us as appropriate - before they have to start e-paying and thus any question of penalties kicks in? We think that the regulations should give this leeway period to the employer by giving a deadline for the Board to issue the “e-payment notice”.
4. In Regulation 42B(6), there seems to be a typo. Is it to be "the" or "an" Officer of the Board?
5. We also wondered about the general principle in 42B(6) - that the Officer "shall" issue a default notice. What happens if the Officer does not issue a default notice? Presumably that means that they cannot surcharge the employer? To pursue the point a little further, we are not wholly clear what would happen if the Revenue did not issue a default notice, the employer then carried on defaulting, then the Revenue eventually woke up and issued a default notice. Could there, in effect, be a retrospective surcharge? The way Reg 42B is worded it seems that the employer is in default (under sub-para 1) if they have not used an approved method of payment. We thought the intention of the default notice was, in parallel to VAT default surcharges, to give the employer a "yellow card" warning, but we are not sure that it works. It does seem that the Revenue could come in with a default notice some time after the event and accompany it with a surcharge. Surely that would be against the spirit of the regulations, ie that the Revenue must initially tell the employer to pay electronically, give them a little time to get sorted, warn them if they are not complying and only then start to surcharge them. To bring this about we think the regulations should say that that a penalty can only arise where a default notice has been issued.
6. It appears that the escalation of penalties begins after the third default, ie the first default starts the surcharge period (Reg 42B(10)(b)(i)), the next two defaults carry no penalty (Reg 42B(10)(a)), the fourth actual default carries a penalty of 0.17% and so on. We have no objection to the principle of escalation, but are concerned that the penalties could get quite large here, and be totally out of proportion to the Exchequer loss. They are also penalties of a size unfamiliar to employers (most employer penalties are set at a £3,000 max). For example, a large employer with a monthly payroll of £1m could end up with a penalty of up to £100,000 for merely failing to pay electronically by the new due date. (In this context we are a little puzzled by the reference in Reg 42B(3) to a payment made otherwise than in cash – surely all electronic payments are non-cash? We also note that this sub-para consists of an 82-word sentence, which does not aid understanding, and will have to be changed when it becomes part of the Tax Law Rewrite PAYE Regulations as mentioned in your website note.)
7. We note that, under these rules (and assuming that “year” means the tax year, as given in Reg 2(1) of SI 1993/744), the surcharge period extends to the end of the year following the last year of defaults. We think this is an excessively long period, particularly for the employer who was last late at the beginning of a tax year. It means that there have to be no glitches in their electronic payments for nearly 24 months before they can move out of the regime. The VAT default surcharge period is only 12 months, and we understood that it was on this system that these rules were to be based.
8. Finally, we query the wording used in Regs 42B(9) and (10) where reference is made to the “year in which the specified payment was due” (our emphasis). A payment of PAYE tax for the tax month to 5 April will be due in the next tax year (21 April), so is the penalty for all late 5 April payments to be based on the total amount of tax due for the next tax year, rather than the year of payment? If this is correct it is going to cause a lot of confusion, and delay, in arriving at the penalty. It also seems to mean that the surcharge period is extended to the end of the next following tax year (although we note that the words “in respect of” are used in 42B(10)(b)(ii) possibly giving a different interpretation). We conclude with an apposite comment from one of our members:
’I have to say I did not find these Regulations easy to read and … it troubles me that we should need further explanations before they work.’
The Chartered Institute of Taxation
5 September 2003
020 7235 9381