Who makes good underpaid PAYE?
How we got here
In 2008 the pendulum swung towards employers following the Special Commissioners decision in Demibourne Ltd v HMRC [2005] SSCD 667 (see Follow up ), and insertion of Regulations 72E to 72G , into the Income Tax (PAYE) Regulations 2003 (SI 2003/2682 ).
In Demibourne a former employee, on reaching 65, continued to work for his former employer on an ad hoc, self-employed basis. HMRC maintained he was still an employee, and the employer was liable for PAYE which should have been deducted - without any offset against tax already paid by the employee as a self-employed worker.
The worker was deemed to have paid PAYE, and could claim a refund of tax paid as a self-employed worker, even though the employer might be unlikely to be able to recover PAYE from the former “employee”; yet the employer was liable to pay employment taxes to HMRC. Enter Regulation 72F , giving HMRC authority to direct that the employer would not be liable for PAYE in such circumstances. This did not give the employer a right to have tax paid to HMRC by the worker credited against PAYE due, but unless the employer acted in bad faith, it was virtually a certainty.
A shock for employers
Move on to 2015, and the decision in Chapter Trading Ltd TC04626 [2015] (see Follow up ) may be a surprise to many.
HMRC amended the employee’s tax code half-way through the 2011/12 tax year, from 747L to 418L. This was done on a cumulative basis. So for tax week 26, tax due to be deducted on a cumulative basis exceeded pay due. Payroll software was set to make no deduction of tax in such circumstances: instead it paid the employee without deduction of tax, producing an exception report showing “insufficient pay for tax.”
Pro advice 1. It can be harder to distinguish cumulative codes from Week 1/Month 1 codes, as HMRC no longer puts a Week 1/Month 1 marker on codes sent to employees.
Pro advice 2. Check what your payroll software default action is if deductions exceed pay due.
Since 6 April 2015, there has been a limit of 50% maximum PAYE deduction of relevant earnings (previously this only applied to K codes).
Employer liability
Employers can be liable if PAYE isn’t operated correctly per PAYE 95011 (see Follow up ). In Chapter Trading , the employer failed to apply an amended tax code correctly, contrary to Regulation 20 (3) (Income Tax (PAYE) Regulations 2003) (see Follow up ).
HMRC may direct that the employee is liable for any tax if conditions A or B are met:
A - employer satisfies HMRC that they took reasonable care and any error was made in good faith.
B - HMRC believes the employee received wages knowing the employer wilfully failed to deduct proper amount of tax.
The First-tier Tribunal found that the employer had not taken reasonable care, through not having acted on the exception reports issued each pay day.
Demibourne Ltd v HMRC [2005] SSCD 667
Chapter Trading Ltd v HMRC [2015] TC04626
PAYE 95011
Regulation 20 (Income Tax (PAYE) Regulations 2003
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