PAYE90020 - Reconcile individual: underpayments: PAYE directions

If an employer fails to deduct the correct amount of PAYE from an employee’s earnings, the employer is liable for the amount under-deducted. The underpayment should be recovered from the employer not the taxpayer, unless HMRC makes a PAYE direction.

Regulations 72(5) and 81(4) of the Income Tax (PAYE) Regulations 2003 govern the making of directions, which can be made if

  • The employer took reasonable care to comply with the Regulations, and the failure to deduct the correct amount was due to an error made in good faith (regulation 72(5) condition A - the ‘honest mistake’)
Or
  • The employer cannot pay the liability (for example due to insolvency, ceased trading) and the taxpayer knew that the employer had wilfully failed to deduct the correct amount of PAYE (regulations 72(5) condition B and 81(4) condition A - the ‘deliberate failure’)

PAYE directions are made centrally by authorised officers in

  • The PAYE Errors Unit (‘honest mistake’ cases), see PAYE92050 
And
  • Teams in Specialist Investigations (‘deliberate failure’ cases) see the Specialist Investigation website and INS8101 onwards

You can find further information in the following subjects

  • ‘Revision of employer’s returns’ at PAYE92060 
  • ‘PAYE errors unit (PEU)’ at PAYE92050 
  • ‘Under-deductions - action required in service teams’ at PAYE92066