IR35 - Penalty Statement
The intermediary service company or partnership through whom you supply your services must calculate the deemed payment and enter this amount, and the tax and NICs due on the deemed payment, on the Employer's Annual Return (Form P35) and accompanying forms. If no P35 is received and the service company legislation applies, a return must still be made of the deemed payment and tax and NICs due. This can be done by requesting the issue of an Employer's Annual Return by the Revenue.
Payment of the tax and NICs on a payment deemed to arise on 5 April is
due by 19 April and interest is charged on late payments. The Employer's
Annual Return has to be submitted by 19 May, otherwise a penalty for late
filing will be charged, though, by concession, a period of grace of 7
days is allowed. A return that does not include the correctly calculated
tax and NICs due, is incorrect, and a penalty, which is based on the tax
and NICs omitted from the return, can be charged when an incorrect return
is made as a result of the employer's fraud or neglect. So, if you, in
your capacity as employer, act prudently by taking all reasonable steps
to understand and ensure that your intermediary service company or partnership
meets its obligations under the service company legislation, no penalty
will be imposed should an incorrect return (P35) be submitted.
Although the information needed should be available, the Inland Revenue
appreciates that some employers may have difficulty calculating the correct
amount of a payment deemed to arise at 5 April before the tax and NICs
are due to be paid on 19 April. However, it should be possible to estimate
the tax and NICs due and so make a payment on account by 19 April. As
the employer, you should do this if you cannot calculate exactly the deemed
payment by 19 April 2001; interest will be charged in the normal way on
any tax and NICs paid after that date.
Some employers may find that they are not even able to calculate the correct amount before the Employer's Annual Return is due on 19 May. To enable you, as the employer, to file the return (P35) on time, you can submit a return and accompanying documents that include estimated amounts for the deemed payment, and tax and NICs due on it, using either the payment on account estimates, or newer more accurate estimates. Where this is done no penalty for an incorrect return will be sought provided all the following conditions are met:
- The return (P35) is submitted by 19 May 2001
- It is stated on the return or in a covering letter that the service company legislation applies to the employer
- An amount is included in the return for the tax and NICs due on the deemed payment
- It is made clear in a covering letter that the amount is provisional pending finalisation of the deemed payment calculation
- A correction to the return and accompanying documents, notifying the correct final amount for the deemed payment and the tax and NICs due, is made by 31 January 2002
- Any additional tax and NICs due as a result of the correction to the return are paid by 31 January 2002
To make it easier for employers to indicate that the service company legislation applies to them there is an additional question on the front of the Employer's Annual Return, but notification that the tax/NICs amounts relating to the deemed payment are provisional should be made in a separate letter.
The above arrangement, which will be reviewed after 2000/2001, allows extra time to make the calculation of the correct deemed payment. No extension will be given to the 19 May 2001 filing date and, in view of the above arrangement, the service company legislation will not be accepted as a reasonable excuse for failing to file the return on time.
If it is discovered that an employer omitted to include a deemed payment, and tax and NICs due on it, in their annual return and accompanying documents, or to inform the Inland Revenue that provisional amounts have been included, the normal approach to underpaid PAYE/NICs set out in leaflet IR 109 - "Employer compliance reviews and negotiations" will be followed. This will be the case regardless of whether the employer has indicated that the service company legislation applies to them or not. Recovery of any unpaid tax and NICs will be sought, and any interest due. Penalties may also be sought for an incorrect return.
Where a penalty is sought, either for omitting a deemed payment or failing to meet the above conditions, our practice of abating penalties to take account of the degree of disclosure, co-operation, and size and gravity of the offence, which is covered in leaflet 109, will be followed. An employer might fail to meet its obligations to file a correct return because of a genuine misunderstanding about the rules caused by their newness. This would be taken into account, along with the effort made by the employer to establish whether a contract is subject to the new rules, when considering penalties
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