SE11950 - PAYE avoidance: employee fails to make good PAYE

Section 144A ICTA 1988

Notional payments

A “notional payment” is defined in Section 203J(2) ICTA 1988 as a payment under

• Section 203B – payment by an intermediary of an employer ( SE11931): or
• Section 203C – payment by non UK employer ( SE11932); or
• Sections 203F to I – payment in readily convertible assets ( SE11802).

Where an employer provides assessable income to an employee in the form of a “notional payment”, the employer is required to operate PAYE. As a “notional payment” does not involve the transfer of money from the employer to the employee, the employer is unable to deduct tax in the usual manner as required by the PAYE regulations. Nevertheless, the employer is required to notify the Inland Revenue of the amount of tax due under PAYE and to pay over that amount to the collector.

Section 203J ICTA 1988 and the Income Tax (Employments)(Notional Payments) Regulations 1994 (SI1994/1212) say how the employer should operate PAYE in respect of a “notional payment”

Calculating the amount of the charge under Section 144A

The employer must calculate the amount of tax that should be accounted for in respect of the “notional payment”. Then Section 203J(1) ICTA 1988 says that the employer should deduct that tax in the first instance from any actual payments made in the same income tax period subsequent to the date of the event giving rise to the “notional payment”. The income tax period will usually be the month ended on the 5th but (exceptionally) may be the quarter ended on the 5th.

If the amount deducted in accordance with Section 203J(1) is insufficient to enable the employer to pay the full amount of tax that should be accounted for, then Section 203J(3) says that the employer is responsible for paying the balance.

Section 144A ICTA 1988 is concerned only with the tax that the employer is required to pay in accordance with Section 203J(3) ICTA 1988.

The employee must “make good” to the employer the full amount of the tax that the employer is required to pay within 30 days of the event giving rise to the “notional payment”. If the employee does not “make good” the full amount within 30 days, then the shortfall is treated as income of the employee assessable to income tax under Schedule E. The amount chargeable to tax should be returned on the relevant form P9D or P11D.

Employer does not operate PAYE correctly

If the employer fails to operate PAYE correctly, then you may need to consider taking action to address that PAYE failure. Regardless of whether the employer operates PAYE correctly or not, if the employer is required by virtue of Section 203J(3) to account for an amount of income tax in respect of a “notional payment”, then Section 144A may apply. However, the amount that the employer is required to account for by virtue of Section 203J(3) remains the same whether or not the employer operated PAYE correctly. Irrespective of the employer’s actions, a Section 144A charge will arise if the employee does not make good the relevant amount of income tax to the employer within 30 days of the date of the “notional payment”.

Employee makes good after more than 30 days

If the employee makes good the relevant amount of income tax to the employer more than 30 days after the event giving rise to the “notional payment”, the Section 144A charge remains. The chargeable date is 30 days after the “notional payment” was made. For example, in the case of a readily convertible asset, this would be 30 days after the employer transferred to the employee ownership of the asset.

Changes to the “notional payments” legislation

Section 144A was not affected by the 1998 changes to Section 203F and associated legislation. These rules are unchanged from 1994 when they were first introduced.