SCIG12500 - Reaching agreement on income or profit addition: Tax treatment: Treatment of PAYE and subcontract deductions from contractor

Additional PAYE, and Class 1 NIC, and contractor’s subcontract deductions due from a sole trader, partnership or company can be included in an overall settlement.

The agreed amounts of PAYE, Class 1 NIC and subcontract deductions are deductions in arriving at profits of a trade or profession. They should be related back to the period in which the additional liability arose, consequently reducing the IT or CT Case I liability (and the related interest and penalty) for the period concerned.

Where admissions have been made that business receipts have been depressed the claim may be pressed that some or all of the concealed receipts have been paid gross to employees or (in a construction industry case) to uncertificated subcontractors. There may be some element of truth in this, but because it is usually very much in the taxpayer’s interest to maximise such an assertion, rather than to accept that the extractions have been applied for the benefit of the principal, we must be very cautious and ensure that any informal discussions are on a without prejudice basis.