Employe under-deduction of PAYE

Employe under-deduction of PAYE

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Employee Y joined employer X in tax year 2006/07.
 
Employer X failed to make the correct PAYE deductions for employee Y for a period of 24 months, resulting in significant under-deducted tax.
 
Employer X used a BR tax code for all 24 months, when a higher rate tax code should be in place.
 
Under the Regulations, I understand X is first liable for the under-deducted tax due, but can appeal to HMRC to make a direction under Regulation 72(5) Condition A.
 
I understand HMRC will grant relief to the employer if they can show they complied with the Regulations with reasonable care, transferring the liability to employee Y.
 
Employer X lost its first appeal, but won a Direction on second appeal (before tribunal) based on their assertion that employee Y did not hand in a P45 form at the start of employment, and a P46 was requested but not signed.
 
Employer X states that a P45 form was only recieved after 24 May 2007 (the cut off after which Part 2 and 3 would be destroyed under Regulation 51(7)). 
 
It argues that only the tax that the employer is liable for under Regulation 68 can be considered under Regulation 72. If there is no liability under Regulation 68 then Regulation 72 simply doesn't apply and any underpayment is the responsibility of the employee.
 
It argues that a liability under Regulation 68 only arises where the employer fails to deduct the requird amount of PAYE from payments to an employee. The required amount is calculated by reference to the appropriae code. The appropriate code is either a code advised by HMRC, shown on a P45 or dictated by the P46 proceedure. Providing the appropriate code has been operated, the employer is not liable for any underpaid tax, even if this occurs as the result of an error of failure in the operation of PAYE by the employer.
 
It argues that as a P45 nor P46 was recieved, it operated a BR code, the correct proceedure at the time, and as such deducted the correct amount of tax.
 
My question is i) Is this a correct interpretation of the regulations (I would read that the employer is first held liable and needs to prove reasonable care, which this does not) and ii) If so, where in the regulations does it state a BR tax code is appropriate following no receipt of a P45 or P45?
 

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Euan's picture
By Euan MacLennan
14th Jan 2012 18:14

Not sure about the Regulations

... but the P46 procedure is set out in the annual E13 booklet, Day-to-day Payroll.

In the 2008/09 version (not 2006/07, but the oldest I could find and it is the same every year), at the top of the right column on page 26, it says:

"Exceptionally, if your employee has not completed the
form P46, or provided you with the information to fully
complete Section one in time for their first pay day, you
must complete Section one to the best of your knowledge
on their behalf and use code BR on a cumulative basis.
"

So, if it is true that the employee did not produce either form P45 or a completed form P46 to the employer when he started, the employer was correct to deduct tax at the basic rate.

But what is the point of pursuing this?  It is the recipient who is liable to pay tax on his income.  At worst, the payer may not have followed the prescribed procedure to the letter, but he has obtained a favourable ruling from the tribunal.  Aren't you flogging a dead horse?

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