SE21790 - Benefits: PAYE tax not deducted from director's emoluments

Section 164 ICTA 1988

Where there is an agreement to make free of tax payments to employees, the employer has to deduct tax from the grossed-up amount of the remuneration ( SE07700).

It sometimes happens however that the employer simply fails to deduct tax under PAYE from remuneration. If this is deemed to be the employer's fault, the tax will normally be recovered by way of a determination under Regulation 80 of Statutory Instrument 2003/2682.

The tax collected under Regulation 80 cannot be charged on the employee as an emolument from the employment under Section 19(1)1 ICTA 1988 as the employer is not discharging a debt of the employee ( SE00580). This is because the obligation to account for PAYE tax falls on the employer. Equally it is not easy to show that in failing to deduct tax an employer has "provided any benefit" on which directors or employees could be assessed under Section 154 ICTA 1988.

In practice the failure to deduct tax from remuneration nearly always occurs in respect of certain directors. So special legislation was introduced to treat the amount of any tax paid by someone other than the director as a benefit chargeable on the director.

For details of this special charge see:

SE21791 - which directors do the special rules apply to?

SE21792 - circumstances in which a charge arises under the special rules.

SE21793 - the amount of the charge under the special rules.

SE21794 - example.

SE21795 - year for which the assessment is made.

See SE11800 onwards where the failure to deduct tax is in respect of a readily convertible asset.