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HMRC internal manual

Collection of Student Loans Manual

Compliance: employer compliance: employer compliance - penalties

This subject is presented as follows

General

The Education (Student Loans) (Repayment) Regulations 2009 provide for penalties for error offences where an employer fraudulently or negligently

  • Makes incorrect deductions

Or

  • Makes an incorrect return of Student Loan deductions

They also provide for a failure penalty where an employer

  • Fails to make a return

Penalties for incorrect deductions

Regulation 68 of the Student Loan Repayment Regulations states

1. Subject to paragraph (3), where in the case of any employee an employer fraudulently or negligently makes incorrect deductions or makes or receives incorrect payments in a tax year, he shall be liable to a penalty not exceeding £3,000 for each employee in respect of whom incorrect deductions or payments are made
   
2. A penalty under paragraph 1 must not be imposed before the end of the relevant tax year and no more than one penalty per employee under that paragraph may be imposed in relation to any tax year
3. This regulation does not apply where an employee has paid an electronic payment default surcharge to HMRC under regulation 203 of the PAYE regulations in respect of an incorrect payment

Incorrect deductions are where an employer has

  • Not made any Student Loan deductions

Or

  • Has made insufficient deductions

Employer Compliance Officers (ECOs) will normally identify incorrect deductions during examination of the wages records.

Once an error has been identified ECOs must then establish whether the employer has been negligent before they can seek a penalty under regulation 68.

A penalty cannot be imposed in-year, only for a closed year.

Incorrect deductions may occur on more than one occasion in a closed tax year but although the offence is repeated the legislation restricts the penalty to one penalty per person per year.

For example if an employer makes incorrect deductions for the same employee in May, June and July 2000 only one penalty is due as the incorrect deductions all occurred in the same year.

If an employer made incorrect deductions for 3 different employees in the same month a penalty would be due for each employee for whom incorrect deductions were made.

Where incorrect deductions for an employee span more than one closed year, a penalty would be due for each year that the offence occurs within the review period.

Penalties for incorrect returns

Regulation 59(8) of the Student Loan Repayment Regulations state

  • For tax years ending on or before 5 April 2009, where an employer fraudulently or negligently makes an incorrect return under paragraph (1) he shall be liable to a penalty not exceeding £3,000 for each employee in respect of whom incorrect particulars are included in the return
  • For tax years commencing on or after 6 April 2009, where the date on which the return is due to be filed is on or after 6 April 2010, where an employer carelessly or deliberately makes an incorrect return under paragraph (1), penalties as set out in Schedule 24 to the Finance Act (FA) 2007 (penalties for errors) will apply as they apply in connection with PAYE

Incorrect returns are where an employer

  • Fails to record the Student Loan deductions on the P14
  • Records an incorrect total on the P14
  • Records Student Loan deductions on the P14 but fails to include them on the P35

Or

  • There is a discrepancy between the P35 and the sum total of the forms P14

Regulation 59(1) only requires employers to return the Student Loan repayments actually deducted. If an employer has under deducted Student Loan repayments but included the amount deducted in their End of Year return this is not an incorrect return.

The only entry required on a P35 is the total amount of Student Loan deductions made. Amounts for individual borrowers are recorded on their forms P14.

A penalty can be sought for each incorrect P14 received where it has been established that the employer has acted either fraudulently or negligently.

Penalties for failure to make a return

Employers are required to make an End of Year return on form P35 of PAYE, National Insurance, SSP, SMP and Tax Credits as well as Student Loan deductions. Where an employer fails to submit an End of Year return, penalties under S98A (2) TMA 1970 will normally be sought.

Regulation 59(5) of the Student Loan Repayment Regulations provides for similar penalties for failure to submit an End of Year return of Student Loan deductions. However, Regulation 59(7) states that a penalty under Reg. 59(5)(a) for the first twelve month failure should not be imposed where a S98A(2)(a) penalty has already been sought.

Employers required to make Student Loan deductions will also normally be responsible for the operation of PAYE and NICs as the earnings threshold for Student Loan deductions exceeds both those for National Insurance and PAYE. In practice, therefore, it is very unlikely that an employer would only be required to make a return of Student Loan deductions. Therefore S98A(2)(a) penalties for failure to submit a return that include Student Loan deductions will apply in the normal way.

Reg.59(5) will only be required where exceptionally S98A(2)(a) does not apply.

Section 98A(2)(a) penalties, are automated and are dealt with by End of Year sections.

If the failure to submit a return extends beyond 12 months a S98A(2)(b) penalty may be appropriate. In these types of cases any Student Loan deductions made, which remain unpaid, should be included in the culpable duty total on which the penalty is based.

Note: Where an employer has not included an entry on a submitted P35 for Student Loan deductions this is an incorrect return rather than failure to make a return

Application of the penalties

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Abatement of penalties

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Incorrect returns

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Incorrect deductions

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Errors operating the deduction scheme

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Failure to operate the deduction scheme

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