Transferring PAYE liability from an employer to an employee

 An interesting case here where HMRC tried and failed to transfer a PAYE liability from an employer to an employee. http://financeandtax.decisions.tribunals.gov.uk//judgmentfiles/j9262/TC05285.pdf

The law at the heart of the dispute was Regulation 72 of the Income Tax (Pay as you Earn) Regulations 2003, SI 2003/2682. They also included the NIC equivalent under regulation 86 of the Social Security(Contribution) Regulations 2001, SI 2001/1004

HMRC’s present argument being pursued in the Murray case is that sums arising to an employee should be seen (and taxed) as income from the employment. If they prove that and Murray is decided in their favour then liability is established in those circumstances and the employer becomes liable.

HMRC then need to transfer that liability to the individual and that requires “permission” under the PAYE Regulations. In this case, that was refused.

Thus HMRC in trying to argue two completely contrary positions, i.e. loans are employment income but the employee should pay the tax, are going to struggle.

There are of course moves to change the PAYE rules to allow a greater transfer of liability in certain circumstances…

In short, presently a transfer of liability is possible only if;

Condition A – the employer satisfies HMRC that it took reasonable care and that any failure to deduct was due to an error made in good faith, or

Condition B – the employee received payments knowing that the employer wilfully failed to deduct tax

In the case here, the taxpayer was the sole director and shareholder of a company and over the years took loans rather than salary/dividends. In years of plenty the loans were cleared from the directors current account by the declaration of a salary/bonus/dividend.

The company was put into liquidation. With no income, there was no money to cover loan accounts. HMRC claimed that the overdrawn loan account was remuneration. Moreover, it’s remuneration that is subject to PAYE and given the circumstances, that PAYE should be paid by the employee/director because both Condition A and B are met.

The Court disagreed. There is a lot of debate about whether the overdrawn account is income for PAYE purposes. There is crucially a statement that as the company treated the sums as income and made provision for the PAYE liability (which was not paid because the company had no funds), then Condition A could not be met.

In looking at Condition B, the Judge asked whether in the SUBJECTIVE opinion of the recipient there had been a wilful failure to deduct that the employee was aware of. He thought not.

Expect an appeal because the dissenting arguments are clear, but for now an interesting restriction in HMRC’s ability. �