Employers Face Fines for PAYE Underpayments Amid HMRC Delays

Instead, growing delays in processing disclosures are creating a new and unintended risk: financial penalties for issues businesses are actively trying to fix.

The policy gap: penalties vs processing delays

At the heart of the issue is a disconnect between HMRC’s penalty framework and its operational capacity. Under current rules, unpaid PAYE liabilities can trigger significant charges over time.

Tomm Adams, Partner, explains:

I am working with employers who have discovered an unintentional underpayment of PAYE and want to proactively resolve this with HMRC. However, disclosure letters being sent in to HMRC are sitting unread for over a year in many cases. HMRC’s position regarding late payment penalties for delays they cause is unclear, making employers fear punishment for doing the right thing.

HMRC’s own website says if someone has not paid a monthly or quarterly PAYE payment in full after 6 months, they will be charged penalties of at least 5% of the amounts unpaid. A further penalty of 5% will be charged if they have not paid after 12 months. This is on top of any interest the underpayments are accruing, at a rate of 7.75% pa, which is materially higher than returns available on cash held in the bank.

A fairness issue for compliant businesses

This creates a fairness issue: taxpayers trying to remediate any errors are effectively penalised for HMRC processing delays that are outside their control. I have been told in the last two weeks that HMRC are currently working on cases from November 2024 despite taxpayers proactively making full disclosures in good faith.

For businesses, this raises broader concerns about certainty and trust in the tax system. Voluntary compliance relies on the assumption that proactive behaviour will be treated proportionately. Where that assumption weakens, so too does confidence.

Commercial and accounting implications

Beyond the principle of fairness, the practical consequences for businesses are significant.

First, there is the direct financial cost. Interest rates on unpaid tax now exceed typical returns on corporate cash deposits, creating a real economic penalty for delays.

While some employers are chancing making prepayments to slow down interest – which is charged at a much higher rate by HMRC than taxpayers would receive for any overpayments – others are worried that amounts will be rejected due to lack of context or simply misallocated. HMRC’s delays also mean uncertainties in the company’s own accounts which can hang over financial year end.

This uncertainty can complicate financial reporting, audit processes, and provisioning decisions – particularly for larger organisations with material PAYE exposures.

What’s driving the backlog?

The underlying cause appears to be structural rather than procedural.

Tomm concludes:

The key factor at play here is under-resourcing in HMRC leading to huge delays and undermining the actions of employers and other taxpayers who are trying to do the right thing.

For businesses, this suggests the issue is unlikely to resolve quickly. Capacity constraints within HMRC have been widely reported, and PAYE disclosures are just one area affected.

Wider implications for tax compliance

This situation has broader implications for how businesses approach compliance risk.

If voluntary disclosures lead to prolonged uncertainty, higher costs, and potential penalties, some organisations may reconsider how and when they engage with HMRC. That would be an unintended consequence for a system that depends heavily on self-reporting.

It also raises questions about whether existing penalty regimes are fit for purpose in an environment where administrative delays are significant.

What you should consider or do next

For employers and finance leaders, the key is to balance proactive compliance with practical risk management:

Document everything: Maintain clear records of when underpayments were identified, when disclosures were made, and all correspondence with HMRC. This may be critical if penalties are later challenged.

Assess financial exposure early: Model potential interest and penalty costs so they can be reflected in cash flow planning and financial statements.

Consider payment strategy carefully: While prepayments may reduce interest, they carry risks if not correctly allocated. Seek advice before proceeding.

Engage advisers proactively: Specialist tax advisers can help navigate HMRC processes, escalate cases where appropriate, and mitigate risks.

Review internal PAYE controls: Strengthening payroll processes can reduce the likelihood of future underpayments and limit exposure to similar issues.

Monitor developments: As pressure on HMRC grows, there may be policy clarifications or administrative changes that affect how these cases are handled.

Would you like to know more?

If you have any questions about the above, please get it touch with your usual Blick Rothenberg contact or Tomm using the form below.