Mandatory Electronic Payments

Summary: These notes update the review of the electronic payment Regulations that appeared in the newsletter of 20 June 2003. All "large" employers must make their payments to their Accounts Office electronically from the start of the 2004/05 tax year. The payment deadline is extended to the 22nd of each month. If payments are not cleared by the new deadline, the employer will incur surcharges that could amount to tens of thousands of pounds.

From April 2004, mandatory electronic payment of PAYE will be introduced for the around 8,000 large employers with 250 employees or more. The stated intention is to "prevent the unfair exploitation of the current cheque payment rules, which can be used to delay transfers to the exchequer".

Currently, payment is treated as having been made when the Accounts Office receives a cheque. However, as it does not normally clear from the employer's bank account until two days later, there is a cash flow advantage from paying by cheque that is not matched by BACS direct credit payments. The Inland Revenue has also found that a minority of employers always send their cheques late as there is no penalty for doing so, and a few employers pay with cheques drawn on overseas banks which take longer to clear.

Of the various options considered to encourage electronic payments and prevent abuse, the Government decided to impose electronic payments only on large employers as they are better able to accommodate the change and pay nearly two thirds of the income tax and NICs yield. In addition, evidence from BACS suggests that, by moving to electronic payments, larger employers are likely to make savings over the current costs of cheque payments.

All large employers were issued with an e-payment notice in November 2003, informing them of their obligations from the 2004/05 tax year.

Legislation
For tax purposes, the legislation for mandatory electronic payments is set out in The Income Tax (Employments) (Amendment) Regulations 2003, which add a number of new regulations to the Income Tax (Employment) Regulations 1993. The Regulations came into force on 20 October 2003, enabling the Inland Revenue to issue notices to the affected employers in advance of the 2004/05 tax year. From 6 April 2004, these Regulations are repealed and they appear instead in the Income Tax (Pay As You Earn) Regulations 2003.

For National Insurance purposes, the Social Security (Contributions) Regulations 2001 and other related Regulations will be amended in March 2004 to require large employers to make their payments of NICs and student loan deductions electronically.

Approved methods of payment
"Large" employers must use an "approved method of electronic communications" to make their payments to the Accounts Office. The following methods are approved by the Inland Revenue:

BACS direct credit - This payment method guarantees that payment will arrive on a specific date. The payment must be initiated at least two days earlier, e.g. for a payment to arrive on a Friday, it must be initiated on the Wednesday before. Two separate payments are required, one for PAYE and another for NICs.

CHAPS same day transfer - This payment method also guarantees that payment will arrive on a specific date as long as it is initiated by a specific time on that same day. Only a single payment for the combined amount of PAYE and NICs is required.

Internet and telephone banking - These are alternative methods of using the BACS and CHAPS services described above. They also guarantee that payment will arrive on a specific date, although the lead time may be longer. In the case of payments that make use of BACS direct credit, two separate payments are required, one for PAYE and another for NICs.

Girobank BillPay using a debit card - Payment is made on the Inland Revenue's website. The payment is validated on-line. Only a single payment for the combined amount of PAYE and NICs is required. Payments take three banking days to clear.

Detailed information about these different payment methods is available at www.inlandrevenue.gov.uk/howtopay/paye.htm .

Electronic payment deadline
As long as payment is made by one of the approved methods, the payment deadline, starting with the 2004/05 tax year, is within 17 days of the end of every tax month or quarter, i.e. the 22nd of the month, instead of the normal 19th. The time that a payment is received is presumed, unless it can be shown to the contrary, to be the time that it is recorded in the Inland Revenue's computer systems.

For large employers, therefore, the first payment for the 2004/05 tax year must be made by an electronic method to arrive not later than 22 May 2004. However, employers of all sizes may take advantage of the 22nd deadline if they pay electronically from 2004/05 onwards.

Although large employers are required by law to pay electronically from the start of the 2004/05 tax year, they will not be penalised if they nevertheless continue to pay by cheque, as long as the payment clears so that it is available in full to the Inland Revenue by the 19th of the month.

In order to meet the electronic payment deadline, the employer must take care to ensure that the payment is initiated at the right time. In most cases, other than in the case of CHAPS same-day transfers, the payment must be initiated two or three banking days before the 22nd. However, if the 22nd falls at a weekend or on a bank holiday, the payment must be received by the last banking day before the 22nd.

Penalties
Even though small and medium-sized employers may make their payments electronically and take advantage of the 22nd deadline, only large employers will be penalised if they miss the deadline.

On each occasion that a large employer defaults during a tax year by failing to meet the appropriate payment deadline, the Inland Revenue will issue a default notice. Following the end of the tax year, the Inland Revenue will issue a surcharge notice that sets out the financial penalty, or surcharge, that will apply in respect of the defaults that have occurred in the tax year that has just ended.

The surcharge in any tax year will be the total of the individual surcharges that have arisen during that tax year and that fall within the surcharge period. The "surcharge period" is a period that

• begins on the day following the day on which the first payment was due for which the employer is in default, and
• ends at the end of a subsequent tax year during the entire period of which the employer did not default in a payment.

Example: An employer is late making an electronic payment that was due on 22 June 2004. The surcharge period starts on 23 June 2004. The default on 23 June is the first default in the surcharge period.

The amount of the surcharge for each default in a surcharge period is a defined percentage of the total of the payments due to the Accounts Office for the tax year in which the default occurs. This is the amount shown as due to the Accounts Office on the employer's P35 for that tax year.

The percentage used to calculate the surcharge for each default depends on how many defaults have been notified to the employer since the start of the surcharge period. The percentage charges for each default, and what that equates to in relation to an employer's monthly payments to the Accounts Officer, are shown in the following Table.

The structure of the surcharges is based on a similar model that is used for VAT. The VAT default surcharge applies to large traders on the Payments on Account scheme. The procedure is more lenient that the VAT default surcharge rates in that

• two warnings are given instead of one before a surcharge is incurred, and
• the maximum surcharge rate is equivalent to 10% of the employer's average monthly payments instead of 15%.

The following worked example illustrates the punitive nature of these surcharge rules. The surcharge period continues, year after year, until a whole tax year goes by without a single default.

Example
A large employer has 1,000 employees and pays £6 million to the Accounts Office each year.

2004/05
The employer is late making the monthly payment on 22 July 2004. The surcharge period starts on 23 July 2004. The employer is late again on one further occasion in the tax year. The surcharge percentage is 0% for these first and second defaults, so there is no cumulative surcharge at the year end. However, the surcharge period continues into the next tax year.

2005/06
The employer is late again on three occasions in the 2005/06 tax year. These are the third, fourth and fifth defaults in the surcharge period. The percentage charge is 0.17%, or £10,200, for each of the defaults. The cumulative surcharge for the tax year is £30,600.

2006/07
The employer is again late on four occasions in the 2006/07 tax year. These are the sixth, seventh, eighth and ninth defaults in the surcharge period. The percentage charge is 0.33%, or £19,800, for the first three defaults, and 0.58%, or £34,800, for the ninth default. The cumulative surcharge for the tax year is £94,200.

2007/08
There are no defaults in 2007/08, so there are no surcharges. The surcharge period ends on 5 April 2008 at the end of a full tax year with no late payments.

2008/09
If the employer were late on any occasions in this tax year, a new surcharge period would start and the default count would start again from scratch.