ECH21011 - Penalties: If an Employer or Contractor is relieved of the liability by a direction

ECH21010 explains that penalties will not be appropriate if an employer or contractor is relieved of the liability by virtue of a direction under Regulation 72(5) Condition A ( ECH22100) or Regulation 9(5) Condition A ( ECH14290) respectively.

However appropriate penalties should be considered if an employer or contractor is relieved of the liability by virtue of

• Regulation 72(5) Condition B ( ECH22101), or
• Regulation 81(4) Condition A or Condition B ( ECH22102), or
• Regulation 9(5) Condition B ( ECH14290)

Directions under both Regulation 72 and Regulation 9 must be considered prior to the issue of formal determinations under Regulation 80 or Regulation 13 respectively and if a direction is given the tax/CIS deductions involved must not be included in the formal determination.

Once the determinations are issued the legislation does not provide for Regulation 72 or Regulation 9 directions to be made.

However if a Regulation 80 determination is made and

• the employer does not pay the amount determined, and
• HMRC are of the opinion that the employee knew of the wilful (deliberate) failure of the employer to deduct tax

then the tax can be recovered from the employee by virtue of Regulation 81(4). This is purely a collection issue and does not detract from the original employer failures.

If the employer has been relieved of paying the liability but you consider they have still been negligent (or worse) in the submission of the relevant employer or contractor returns you should still consider a penalty for submission of the relevant incorrect returns based on the amount of liability on which the employer or contractor was relieved ( ECH21040 & ECH21255).

However the practicality and viability of the imposition of a penalty should be a considered where a direction is made because the employer is unable to pay the PAYE liability (for example because of insolvency).