FAQ: New legislation to transfer a PAYE liability from an employer to an employee
Contents
What is the effect of this new legislation?
In what circumstances will HMRC make a direction under this new legislation?
Does this new legislation apply to tax years which ended before 6 April 2008?
What will be the effect on the employer as a result of HMRC making of a direction?
What will this mean for employees for whom a direction is made?
Will HMRC issue notices of directions to both employers and employees?
Can employees appeal against the issue of a direction?
Will the employer be liable to interest and penalties on amounts directed to employees?
What about National Insurance contributions (NICs)?
What is the effect of this new legislation?
The amendments to the PAYE (Pay As You Earn) Regulations, which take effect from 6 April 2008, extend the limited circumstances in which HM Revenue & Customs (HMRC) can make a direction to transfer a PAYE liability from an employer to an employee subject to certain conditions being satisfied.
In what circumstances will HMRC make a direction under this new legislation?
HMRC will consider making a new direction in circumstances where the following conditions are satisfied:
- an employment relationship exists and the employee has received relevant payments (including notional payments) in relation to which the employer was required to deduct or account for tax in accordance with the PAYE Regulations
- the amount of tax which the employer was required to deduct or account for in accordance with the PAYE Regulations in relation to the relevant payments exceeds the amount of tax actually deducted or accounted for
- HMRC considers that a liability to tax has been assessed on the income in question in a Self Assessment (SA)) made by, or on or behalf of, the employee; or where a SA has not yet been made but HMRC consider that Income Tax has been paid in relation to the income in question as a SA payment on account or as a sub-contractor deduction
- one of the following trigger events has occurred on or after 6 April
2008 (and none of them has occurred before that date):
- the issue of a notice of determination of tax due from an employer which includes tax on the relevant payment in question.
- the receipt of the employee’s SA which includes an adjustment for a PAYE credit in relation to the relevant payments in question.
- the receipt of an amended SA from the employee, or an error or mistake claim, which includes an adjustment for a PAYE credit in relation to the relevant income in question.
- the receipt of a letter of offer to agree an amount in settlement of the employer’s liability to pay an amount of tax, including tax on the relevant payment in question.
Does this new legislation apply to tax years which ended before 6 April 2008?
The new regulations will be capable of applying to tax years which ended before 6 April 2008 provided that none of the trigger events specified as a condition for making a direction occurred before 6 April 2008.
What will be the effect on the employer as a result of HMRC making of a direction?
The employer will be relieved of a PAYE liability otherwise due in accordance with the PAYE Regulations to the extent of any amount (or combined amounts) of tax specified in a direction to an employee or employees for the tax year in question. However, the employer will remain liable for any PAYE tax in excess of the amount covered by the direction.
What will this mean for employees for whom a direction is made?
The amount specified in a direction issued to the employer and employee will be restricted to the amount of Income Tax that HMRC considers has been assessed or paid by (or on behalf of) the employee under the Self Assessment (SA) regime. The employee will still be entitled to a PAYE credit for tax which the employer was required to deduct or account for and failed to do so, but the credit will exclude any tax specified in a direction.
In practice this means the employee’s SA for the year or years in question can remain undisturbed. The tax already assessed in accordance with the SA will equate to the transferred PAYE liability. Where a direction is made in relation to tax paid as a payment on account of tax payable under SA, the employee’s entitlement to include a PAYE credit in the SA for that year will be reduced by the amount of tax specified in the direction.
The new legislation provides that HMRC may issue a direction. Does this mean HMRC will be selective in the cases where directions are issued?
Where the conditions for making a direction are satisfied HMRC will usually exercise its power to make a direction.
However, there may be exceptional situations where it might be inappropriate to consider a direction. For example, in cases where it is evident to HMRC that an employer has deliberately influenced the actions of an employee in an attempt to avoid their PAYE obligations, HMRC may choose not to make a direction. There may be other cases, but it is impossible to predict in advance all of the exceptional situations where HMRC might choose not to make a direction.
Will HMRC issue notices of directions to both employers and employees?
Where a direction is made under the new regulations HMRC will issue notices of direction to both the employer and the employee (unless the employee’s current whereabouts are unknown by both HMRC and the employer). In a case where directions are made in relation to more than one employee of the employer, the notice to the employer will cover the combined amounts of tax specified in the notices of directions to individual employees.
Can employers appeal against the non-issue of a direction, or the amount of tax specified in a notice of direction?
There is no right of appeal for the employer, either against the non-issue of a direction under the new regulations or against the amount of tax the employer is relieved of having to pay. The main reason is because the underlying conditions which must be satisfied in order for a direction to be made are dependent on the individual circumstances of the employee and the employer is not in a position to know with any certainty whether the conditions have been met.
Can employees appeal against the issue of a direction?
There is a right of appeal for employees against the issue of a direction. The employee can appeal if they believe that:
- they did not receive a relevant payment
- the tax specified in the direction is incorrect because an amount of tax in respect of the relevant payment or payments in question has not been assessed in a SA, or paid on account towards a SA, or deducted as a sub-contractor deduction
- a trigger event occurred before 6 April 2008
- no trigger event has occurred
Any appeal by the employee against a notice of direction must be made to HMRC within 30 days of the date of issue of the notice and must specify the grounds for appeal.
Will the employer be liable to interest and penalties on amounts directed to employees?
The employer will remain potentially liable to penalties on the full amount of tax which should have been deducted, or accounted for, in accordance with the PAYE Regulations. The extent to which penalties are charged will depend on the degree of culpability of the employer.
Interest will be charged on any balance of tax remaining payable by the employer after a direction has been made, but the employer will not be liable for interest on any amounts which have been covered by a direction.
What about National Insurance contributions (NICs)?
There are no corresponding amendments required to the National Insurance contributions Regulations as HMRC already has legal authority to set off wrongly paid Class 2 and 4 contributions against Class 1 (employee) contributions properly payable.
