ECH22101 - Settlement: Direction under Regulation 72(5) Condition B

Employers are responsible for the correct operation of PAYE and normally will be held responsible for any failures.

However if the employer cannot pay what is due (for example because of insolvency) and an under-deduction relates to a particular employee or director, HMRC may consider relieving the employer of the liability and effectively transferring it to the employee or director. Regulation 72(5) Condition B directions are considered by a NTSCI - Insolvency Compliance & Securities (ICS)

ICS will consider making a direction where

• an employee or director knew that the employer had wilfully (that is deliberately) failed to deduct the correct amount of PAYE from their earnings, and
• the prospects of recovery from the employee or director are reasonably good

For Directors

The Regulations are used most frequently for directors in small private limited companies where they are in effect acting in two capacities:

• as the employer paying themselves employment income
• as an employee

There must be firm evidence that the director at the time of the relevant payment had some stake in, or control of, the business finances of the company, or was in a position to exercise such control.

Other employees

These could be

• an officer of an unincorporated body such as a club
• a wages clerk, manager or company accountant who had a measure of control over the relevant business finances and/or wages records
• a shadow director controlling company finances and contriving to avoid tax deductions by that company.

There must be reasonable evidence that the employee

• could have controlled the operation of PAYE on their own earnings.

More information can be found in the Insolvency Manual (INS8100 onwards).

Action by Caseworker

See ECH22104

Penalties for incorrect returns

See ECH21011