Mandatory Electronic Payment – Surcharge

Default Notices

If you are a large employer you may face a surcharge at the end of each tax deduction year if HMRC does not receive cleared funds in respect of the full monthly payment by the new payment date (22nd of each month).

HMRC will send large employers a Default Notice every time a cleared monthly payment (or any part of it) is received after the new payment date.

Amount of Surcharge

The amount of surcharge depends on how many times you pay late and are sent a Default Notice and is a percentage of the amounts payable for the year as shown on the end of year return, form P35.

Each default attracts a percentage rate of surcharge which increases as the number of defaults continue within a surcharge period. The actual percentage used for the annual surcharge calculation is the total of the percentages that apply to each of the defaults within the year.

The surcharge period starts at the point in the deduction year in which the default first occurs and does not end until there has been a complete tax year with no defaults. Once default has occurred it could take an employer as long as 23 months to be completely clear of a surcharge. For example, if the employer defaults in May 2004 (deduction year 2004-05) they will need to ensure they do not default again in the remainder of deduction year 2004-05 and ensure they do not default at all in deduction year 2005-06.

Each default is counted within each surcharge period. The first two defaults in a surcharge period are charged at zero per cent. Further defaults are counted and are charged at increasing percentage rates as shown in the following table.

 
Default number
(within the surcharge period)
Specified Percentage
%
1
0
2
0
3
0.17
4
0.17
5
0.17
6
0.33
7
0.33
8
0.33
9
0.58
10
0.58
11
0.58
12 and more defaults
0.83

Example 1

An employer defaults four times in 2004/2005, five times in 2005/2006, once in year 2006/2007 four times in year 2007/2008, no defaults in 2008/2009 and three defaults in 2009/2010.

Surcharge would be calculated as follows:

 
Tax Year
Default count
(at tax year end)
Surcharge percentage
(at tax year end) %
Surcharge on a net charge of £600K pa
Surcharge on a net charge of £12M pa
2004/05
4
0.34
(0 + 0 + 0.17 + 0.17)
£2,040
£40,800
2005/06
9
1.74
(0.17 + 0.33 + 0.33 + 0.33 + 0.58)
£10,440
£208,800
2006/07
10
0.58
£3,480
£69,600
2007/08
14
3.07
(0.58 + 0.83 + 0.83 + 0.83)
£18,420
£368,400
2008/09
0
No surcharge and surcharge period ends as no defaults in the tax year
0
0
2009/10
3
0.17
(0 + 0+ 0.17)
£1,020
£20,400

The example illustrates that the surcharge calculation only starts again from zero per cent after a full tax year has passed without any default. In this example, that is not until tax year 2009/10.

Any large employer who defaults and is liable for surcharge will be sent a Surcharge Notice with a calculation detailing the amount of surcharge due for the tax year.

Example 2

An employer incurs no defaults at all in 2004/2005. In 2005/2006 the employer fails to make a payment by the due date on three occasions and receives three defaults. In addition the employer pays its CIS deductions late twice that year and receives a further two defaults. In 2006/2007 the employer again pays its CIS deductions late twice and receives a further two defaults.

Surcharge would be calculated as follows:

 
Tax Year
Default count
(at tax year end)
Surcharge percentage
(at tax year end) %
Surcharge

2004/05

0

0

£0

2005/06

5 CIS defaults and
3 defaults each on PAYE, NIC and Student Loan (SL) duties

CIS % used = 0.51
(0 + 0 + 0.17 + 0.17 + 0.17)

PAYE / NIC / Student Loan % used = 0.17 (0 + 0 + 0.17)

CIS surcharge is £255
This is based on 0.51% of the 2005/2006 CIS annual charge of £50,000

The PAYE / NIC / SL surcharge is £935
This is based on 0.17% of the combined 2005/2006 annual charge of £550,000

So total 2005/2006 surcharge is £1,190 (255 + 935)

2006/07

7 CIS defaults and no defaults for PAYE, NIC and SL duties.

CIS % used = 0.66 (0.33 + 0.33)

No surcharge charged on PAYE, NIC and SL duties. The surcharge period ends in respect of these duties as no default of these duties occurred in the tax year

CIS only surcharge, which is £330

This is based on 0.66% of the 2006/2007 CIS annual charge of £50,000

Appeals

A large employer has the right of appeal against a Default Notice on the grounds that either:

  • They are not in default (they may have a reasonable excuse for paying late, as a result of circumstances beyond their control).
  • They are not a large employer (however the employer cannot appeal on the grounds they are not a large employer, if they have already appealed unsuccessfully against the statutory notice telling them they are a large employer).

Inability to pay is not a reasonable excuse. A large employer may appeal against a Surcharge Notice on the grounds that the number of defaults stated in the notice is incorrect or the amount of surcharge is incorrect. In both cases the appeal has to be made within 30 days of the Notice. The appeal must include:

  • The PAYE reference.
  • The PAYE scheme name.
  • The reason for the appeal.
  • The appellant’s position in the business.
  • The appellant’s signature (followed by being printed in capitals).
  • The date.