Recovering PAYE tax not deducted by the employer

In the Newsletter dated 26 March 2004, we reviewed changes to the PAYE Regulations that involve the making, by the Inland Revenue, of

• "directions" that can make employees liable for tax unpaid by the employer, and
• "determinations" that can make employers liable for unpaid tax.

The latest issue of Tax Bulletin, issue 70, contains an article that reviews these changes in detail.

(Source: www.inlandrevenue.gov.uk/bulletins/tb70.pdf )
...back to 23 April 2004

Recovering PAYE tax not deducted by the employer

Changes are being made, effect 12 April 2004, to the PAYE Regulations that enforce the payment of tax due to the Collector of Taxes. The provisions of The Income Tax (Pay As You Earn) (Amendment) Regulations 2004 affect the making, by the Inland Revenue, of

• "directions" that can make employees liable for tax unpaid by the employer, and
• "determinations" that can make employers liable for unpaid tax.

Regulation 72 directions
Regulation 72 of the Income Tax (Pay As You Earn) Regulations 2003 allows the Inland Revenue to make a "direction" that an employee is responsible for paying income tax, plus interest in certain situations, that should have been deducted by the employer under PAYE in two distinct situations, i.e. where

• the employer had taken reasonable care to make the deduction but the failure to deduct the full amount of tax due was the result of an error made in good faith, or
• in the opinion of the Inland Revenue, the employee received payments from the employer knowing that the employer had wilfully failed to deduct the full amount of tax due.

The new amendment Regulations allow the employer, in the first of these two situations, to request the Inland Revenue to make a "direction", requiring the employee to repay the tax shortfall. The request must explain how, despite the employer's reasonable care, the error occurred and give details of the under-deduction for the employee(s). The new rules include an appeal process for the employer to follow if the Inland Revenue declines to make the direction, thereby holding the employer responsible to pay the under-deducted tax.

A new appeal process is also introduced in the second of the two situations described above, allowing the employee to appeal against a direction made by the Inland Revenue.

Regulation 80 determinations
There are a number of situations where the Inland Revenue can make a "determination", requiring that an employer pay PAYE tax that has not been paid over to the Collector. These are where:

• form P35 shows that the employer has paid over less in the year than the amount due
• the employer has failed to make a payment for a tax period, or pays less than the Inland Revenue has reason to expect to be paid
• an audit of the employer's records shows that there is an amount of tax unpaid.

A "regulation 80 determination" has the effect of turning the unpaid tax into the liability of the employer, thereby removing any liability for such tax from the employees from whom the tax was, or should have been, deducted.

Regulation 81 allows the employer not to pay any amount of a "regulation 80 determination" where

• in the opinion of the Inland Revenue, the employee received payments from the employer knowing that the employer had wilfully failed to deduct the full amount of tax due, or
• the unpaid tax is an amount for which the employer was required to account on a notional payment made to the employee.

If the employer fails to pay the amount in the "determination" that relates to one or other of these two situations, the Inland Revenue may make a "direction", requiring the employee to make the payment instead.

It should be noted that where, in the second of these two situations, the employee has received a notional payment and subsequently fails to pay to the employer, within 90 days of receiving the notional payment, any tax on the payment that could not be deducted from the employee's earnings, the employer must report the amount of unpaid tax on the employee's form P11D as a further taxable benefit. However, that does not remove the liability of the employer or, if a direction is issued by the Inland Revenue, the employee to pay over the unpaid tax to the Collector.

The new amendment Regulations that come into force from 12 April 2004 make provision for the employee to make an appeal against a direction that the employee is liable for the unpaid tax.
(Source: www.inlandrevenue.gov.uk/si/2004-0851.pdf )
...back to 26 March 2004

Recovery of overpaid tax

In a news item dated 12 September 2003, we explained the repercussions of a recent High Court decision that would allow tax that has been paid in the past to be treated as overpaid tax in the event of a future change in tax law and to be recovered under the mistake of law principle. To protect future tax revenue's, the Inland Revenue has decided to introduce new legislation in the Finance Bill in 2004 that will prevent the six-year limitation period applying retrospectively to any claims brought under a mistake of law from 8 September 2003 onwards.

The draft legislation that was published at that time has been revised in the light of events. It appears that, in the light of the planned change in legislation, some claimants who had started proceedings before 8 September are now seeking to amend their claims to include further years on the basis that such an amendment is treated as a new action but started on the date of the original action. To prevent this from happening, the draft legislation now prevents amendments being made to proceedings for relief from the consequences of a mistake of law, which were commenced before 8 September, to introduce new periods of claim for years beyond the normal time limits. The change does not affect applications made to the courts before 20 November 2003.
(Source: http://www.gnn.gov.uk/gnn/national.nsf/IR/C637...4 )
...back to 21 September 2003

Agricultural gangmasters

The Environment, Food and Rural Affairs Select Committee published its report into the illegal activities of agricultural gangmasters on 18 September 2003.

Agricultural gangmasters provide casual labour to the agriculture and horticulture industry, mainly for picking crops and packing fresh produce. Although many operate legally and provide an essential service to the industry, the EFRA report highlighted those that are involved in illegal and exploitative practices.

Responding to the report, the Government announced that Inland Revenue teams are currently in the process of recovering £;4.3 million in unpaid tax and National Insurance contributions from gangmasters from last year. The Government also stated that "the Committee's report focuses on agriculture and horticulture but the abuses identified are part of a pattern of unlawful activity affecting many sectors of the economy."
(Source: www.defra.gov.uk/news/latest/2003/gangmasters.htm )
...back to 19 September 2003

Recovery of overpaid tax

The decision of the High Court on 18 July 2003 in the case of Deutsche Morgan Grenfell Group Plc v. The Commissioners of Inland Revenue and HM Attorney General has prompted the Government to introduce changes to tax law in the Finance Bill 2004. The issues raised by this case affect the right of individuals and companies to seek the repayment of overpaid tax.

Deutsche Morgan Grenfell (DMG) had made three payments of advance corporation tax (ACT), the earliest in 1993. Subsequently, the law governing payment of ACT was changed by a decision of the European Court of Justice (ECJ) in 2001, thereby allowing companies to seek repayment of overpaid ACT. However, under the provisions of the Limitation Act 1980, an action founded on tort or on simple contract may not be brought after a period of six years counting from the date when the cause of the action occurred. However, in the case of an action based on the consequences of a mistake, the six-year limitation period applies from the discovery of the mistake. By making their claim on the grounds of common law, DMG were able to argue that the six year limitation period started in 2001 when the EJC made its decision.

The High Court agreed that a claim may be made for restitution of money paid under a mistake of law. The 1998 decision of the House of Lords in case of Kleinwort Benson Ltd v. Lincoln City Council overturned the previous general rule that overpayments due to a mistake of law could not be recovered. The High Court also ruled that it made no difference that the claim for restitution was in regard to an overpayment of taxes. The decision was given in favour of DMG.

The implications of this decision are that

• an overpayment due to a mistake could be discovered many years in the future and an action could be taken to recover the overpayment within six years of that discovery.
• current understanding of tax law could be overturned by a court decision at some time in the future, leaving it open for taxpayers to argue that their payments made under the previous understanding were made under a mistake of law and therefore recoverable.

As the DMG decision leaves tax revenues vulnerable to such situations, the Inland Revenue is appealing the decision of the High Court. However, irrespective of the outcome of the appeal, the Government has announced that it will introduce changes to legislation in the Finance Bill 2004 so that the six-year time limit counting from the discovery of the error does not apply to a mistake of law relating to a taxation matter. The change will apply retrospectively to any claims brought under a mistake of law from 8 September 2003 onwards.

The overall effect of this change in legislation is that taxpayers, individuals or companies, will continue to be able to claim reimbursement of overpaid tax within six years (five year in Scotland) counting from the time the tax was paid.
(Sources: www.gnn.gov.uk/...
www.courtservice.gov.uk/judgmentsfiles/j1892/dmg_v_ir.htm )
...back to 12 September 2003

Employment Retention Scheme and Return to Work Credits

The Department for Work and Pensions (DWP) announced, in June 2003, that a new pilot scheme, the Employment Retention and Advancement Scheme, is to be introduced in six areas to help people retain their jobs and progress in them. The scheme will run for 33 months and will evaluate the effectiveness of the in-work training and assistance provided to employees who have found work under the New Deal. The scheme offers financial incentives to employees, including retention and training bonuses.

A further pilot scheme, the Return to Work Credit, is designed to provide a financial incentive to return to work following a period on Incapacity Benefit. It will offer £;40 per week to employees with earnings below £;15,000.

Payments to employees under these two schemes will be free from PAYE income tax and Class 1 NICs. The Regulations implementing these provisions have been made and come into effect from 1 October 2003.
(Sources: www.dwp.gov.uk/publications/dwp/2003/pathways2work.pdf
www.dwp.gov.uk/publications/dwp/touchbase/2003/tb32.pdf
www.inlandrevenue.gov.uk/si/2003-2340.pdf
www.inlandrevenue.gov.uk/si/2003-2339.pdf )
...back to 12 September 2003

Reimbursement of bank charges

The Inland Revenue has confirmed that payment of an employee's bank charges, where the payment is prompted by the failure of the employer to pay wages or salary at the recognised time, is not subject to PAYE tax or Class 1 NICs.

The payments do not derive from the employment but are intended to compensate the employer for breach of contract. The employee accepts the payment in return for giving up the right to sue the employer for compensation.

Where employers have deducted tax and NICs through the payroll, they may refund the deductions and are encouraged to discuss the arrangements with their tax office.
(Source: www.inlandrevenue.gov.uk/bulletins/tb65.pdf)
...back to 27 June 2003