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Clarity on interest charges on PAYE paid by direct debit

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Published: 14 Nov 2022 Update History

HMRC confirms that late payment interest is charged from normal due date and then cancelled once payment is received by direct debit a few days later.

Employers have been able to set up a recurring direct debit to pay their PAYE liabilities since early October. However, as the direct debit is collected later than the due date for electronic payments (22nd of the month), some have raised concerns that HMRC will charge interest.

This concern has been exacerbated by the fact that, between the due date for electronic payments and the date that the money hits HMRC’s bank account, HMRC’s employer liabilities and payments account shows interest owing with the caption, “Direct debit will collect”. However, once the money has been collected, HMRC’s systems automatically cancel the interest charge.

The date on which the PAYE liability is collected under the variable direct debit process will vary from month to month. The liability is collected three working days after HMRC’s systems send an advance notification to the employer’s inbox. The date on which the advance notification is sent is day 20 of the month or the next working day. 

The explanation posted by HMRC in its Agents Forum is reproduced below. This contains some helpful examples:

“Once a recurring Direct Debit has been set up, the collection process can only commence and conclude on a bank working day.

“The first step is that we will send a secure message to your client’s inbox within Business Tax Account showing the Direct Debit amount. This is called the Advance Notification and it will be issued on 20th or the next working day if 20th is not a working day.

“Collection from the bank will happen on the 3rd bank working day after the Advance Notification is issued. This means the collection will always be after the 22nd of the month.

“In October, collection took place on the 25th and interest charges were reversed late on the 25th.

“As the due date for electronic payment is the 22nd of the month, the charges within the online account will show as overdue and accruing interest may be shown. Once the Direct Debit has been collected, our financial systems will update and reverse any interest for the short period between the 22nd and the date the payment was received. This happens because strictly the charges are overdue until the payment is received. The payment will be credited as though received on or before the Due Date. If the Direct Debit cannot be collected, such as because there were insufficient funds in the bank account, the interest calculated from 22nd will stand.

“An example of this will be November 2022 –

  • Advanced Notification will be issued on Monday 21 November
  • Money will be collected on Thursday 24 November
  • Interest for late payment will show between 22nd and 24th
  • Interest will be removed late on 24 November when the payment is processed by our systems

“Although the online account may show interest as due for small time period it will also show “Direct Debit will collect” against the charge. We hope this will alleviate Employer concerns.

“We are monitoring all feedback relating to this new service and will take this into consideration when making any future changes.

“Here’s an example with December dates; these are not impacted by Christmas or New Year

  • Setting up a Direct Debit on or before 15 December is enough time for it to be set up with the bank, and the payment will be collected on Friday 23 December
  • Setting up a Direct Debit on 20 December or later, is too late for it to collect the payment due in December (but will be fine for January collection)
  • Setting up a Direct Debit on 16 to 19 December is not recommended as it will lead to an uncertain outcome since some banks will set up the Direct Debit straight away, and we will collect the money, but other banks will not process the setting-up quickly enough, so we will not be able to collect. This is outside of HMRC’s control.

“If your client only needs to pay quarterly, then as long as they set up a Direct Debit by 17 January, the Direct Debit will collect all the amounts due for Months 7, 8 and 9 on 25 January."

As this is a new service, ICAEW would welcome feedback from employers who choose to set up a variable direct debit. Please send feedback to Peter.Bickley@icaew.com

Details about how to join the forum can be found at Report and resolve a tax problem 

 
Changelog Anchor
  • Update History
    30 Nov 2022 (12: 00 AM GMT)
    Please note the date for when the advanced Notification will be issued has been corrected to 21 November
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