PAYE140010 - The PAYE discretion at s684(7A)(b) ITEPA 2003 and contractor loans avoidance schemes: contents: the categories of schemes where an officer of HMRC may consider using the PAYE discretion

Considerations when exercising the PAYE discretion
Considerations for all relevant contractor loans avoidance schemes

Considerations when exercising the PAYE discretion

The considerations that may be taken into account by an officer considering applying the PAYE discretion may vary depending on the following factors

  • when the scheme was used: whether the scheme was used before or from 2014
  • type of scheme used, whether the scheme is
  • an offshore employer scheme, or
  • a trading income scheme (either offshore or onshore)
  • underlying tax charge: whether the PAYE discretion is being considered in relation to the liabilities arising from the original loans or the Loan Charge

These different factors result in three categories of schemes where the considerations an officer of HMRC may consider may be similar:

Category 1: Offshore employer scheme used anytime, and offshore trading income scheme used before 2014 (when applying the PAYE discretion in relation to the original loans) - where the nature and operation of the scheme may mean it is reasonable to conclude that an End Client (before 2014) or UK Agency (from 2014) exercising reasonable due diligence could not have been aware that they were required to operate PAYE. See PAYE140015 for more information.

Category 2: Offshore and onshore trading income scheme used from 2014 (when applying the PAYE discretion in relation to the original loans) - where the nature and operation of the scheme means that it is reasonable to conclude that it may not have been possible for a UK Agency to determine the timing of the payment of PAYE income or the nature of that income in order to operate PAYE. See PAYE140020 for more information.

Category 3: Offshore and onshore trading income scheme used from 2014 (when applying the PAYE discretion in relation to the Loan Charge) - where the nature and operation of the scheme means that it is reasonable to conclude that the UK Agency was not aware of its obligation to operate PAYE on the Loan Charge. See PAYE140025 for more information.

The above outlines what an officer of HMRC may consider are the most relevant factors for exercising the PAYE discretion. However, what an officer considers relevant for each individual may vary depending on the specific facts and circumstances of each individual’s case. This guidance should not be read as to limit the factors an officer can take into account when considering exercise of the PAYE discretion.

Considerations for all relevant contractor loans avoidance schemes

HMRC expects employers and engagers of individuals to undertake reasonable due diligence to establish whether they have obligations under PAYE. However, schemes are often complex and frequently interpose several layers between the entity paying the individual and the End Client or the UK Agency - the effect of which is to disguise the nature of the arrangements.  

The principles below apply when an officer is considering whether to use the PAYE discretion (i.e. where it may be unnecessary or not appropriate for the End Client or the UK Agency to comply with PAYE Regulations). 

In all cases it is important to consider the period each avoidance scheme is used for and make a decision as to the use of the discretion for each use of the scheme before and after the Employee of non-UK employer rules and/or the agency rules changed. For example, for scheme usages which span over two periods before and after 2014 an officer needs to consider the usages separately and consider the appropriate relevant factors independently when making a decision on whether to use the discretion.

This guidance is not intended to be an exhaustive list of considerations an officer should take into account when considering exercise of the PAYE discretion. What an officer considers relevant for each individual may vary depending on the specific facts and circumstances of each individual’s case.  There may be circumstances which are not included within this guidance which may be considered relevant by an officer when considering exercising the PAYE discretion.

The decision-making process should be recorded for audit trail purposes and needs to include all facts, relevant information considered as well as any assumptions being made.

Officers of HMRC must follow public law principles when considering the exercise of the PAYE discretion. In particular, they must consider all the available facts and evidence, taking into account all relevant factors and ignoring irrelevant factors.

It is not sufficient to simply consider that because an avoidance scheme has been used and tax underpaid that it would be appropriate to disapply the PAYE Regulations in order to collect the unpaid tax from the individual.