SE11902 - PAYE avoidance: the amount on which to operate PAYE

Section 203F(3) ICTA 1988

Estimating the amount chargeable under Schedule E

Where an employee is awarded or otherwise acquires unquoted or restricted shares, it may not be possible for the employer to operate PAYE on the exact figure of income chargeable to tax under Schedule E. The employer may need to estimate the value of the shares in order to calculate the amount on which to operate PAYE.

Where employers in these circumstances wish to check whether the Inland Revenue agrees their valuation is reasonable they may write to Shares Valuation (PAYE valuations) at Fitzroy House, Castle Meadow Road, Nottingham, NG2 1BD.

Employers should provide full details of the transaction and make it clear they seek a valuation check for PAYE purposes - it will not normally be possible for a formal valuation for PAYE to be agreed by the date the employer must operate PAYE, but these valuations will act as informal checks for PAYE purposes only.

Consequences of using an estimated figure

Where PAYE is operated on an estimated figure neither the Inland Revenue nor the employer is obliged to accept that amount when calculating the final Schedule E liability. For instance, information on restrictions influencing the share value may come to light after the date on which the employer must operate PAYE.

Consequently the figure on which the employer operates PAYE may be different from the amount subsequently included in the employee's Self Assessment. The employer's obligation is to operate PAYE at the right time on the best estimate that can be reasonably made at that time of the income chargeable to tax.

If an employer meets this obligation, any discrepancy between this figure and the final Schedule E liability will be dealt with after the end of the year through the employee's Self Assessment. In the Self Assessment the employee must return the correct amount chargeable to tax and the amount of PAYE deducted and accounted for.

If an employer operates PAYE on a figure which is less than the best estimate of the amount chargeable to tax, the employer will fail to meet his obligations to operate PAYE correctly and action under Regulation 80 procedures should be considered.