PAYE coding notice - deliberate misstatement

PAYE coding notice - deliberate misstatement

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I was wondering how other professionals deal with clients who are issued with PAYE coding notices that are incorrect; in the client's favour. Specifically thinking about:

1) Leaving the code in place creates a cash-flow advantage to the client. After the tax year ends the client pays the underpaid tax to HMRC in time for the following 31 January so HMRC do not lose tax but the client's cash-flow advantage is their cash-flow disadvantage. Are there any penalty issues if the client/advisor looks at the code, recognises this, and decides to leave the code as it is?

2) If the incorrect coding notice has been issued because of false information provided by the taxpayer, I assume there must be some issues here? How would HMRC actually go about proving that a client had given incorrect information deliberately, given that when a coding notice is put together it is only ever an estimate?

3) How does it work with EIS adjustments to coding notices? Must the investment have already been made before having an adjustment put in?

Any reference to guidance or legislation dealing with this would be appreciated. Going through my mind is defrauding the public revenue but not sure.

Replies (25)

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Locutus of Borg
By Locutus
19th Apr 2014 10:10

You're thinking too much
Just use the code you are given. That is all you are required to do.

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By User deleted
19th Apr 2014 10:44

A couple of points ...

... firstly, if the information the code is based on is false, it has presumably come via you, the agent, so you have a potential MLR issue.

Secondly, ask the client, if I get one that is obviously too high I will write and ask the client and make clear they will have a liablity to pay the following year (give an estimate). Too many clients are happy to take the cash-flow advantage but will blame you when they get the big bill later! It is their tax code, let them decide, but make sure they have all the facts.

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Replying to Paul Scholes:
RLI
By lionofludesch
21st Apr 2014 10:10

Maybe not

Old Greying Accountant wrote:

... firstly, if the information the code is based on is false, it has presumably come via you, the agent, so you have a potential MLR issue.

I'm not sure that's true, OGA.  After all, notices of coding don't change your liability.  They just alter the time of payment.

Having said that, deliberate mis-statement is something with which I'd not be comfortable.

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Replying to kevinringer:
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By User deleted
21st Apr 2014 23:40

I said potentiallly

lionofludesch wrote:

Old Greying Accountant wrote:

... firstly, if the information the code is based on is false, it has presumably come via you, the agent, so you have a potential MLR issue.

I'm not sure that's true, OGA.  After all, notices of coding don't change your liability.  They just alter the time of payment.

Having said that, deliberate mis-statement is something with which I'd not be comfortable.

It would depend on the circumstance - if you steal someone's bike to ride home at night and take it back next morning you have still committed theft!

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Replying to lionofludesch:
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By The Accountant
23rd Apr 2014 12:15

Theft?

[

[/quote]

It would depend on the circumstance - if you steal someone's bike to ride home at night and take it back next morning you have still committed theft!

[/quote]

Actually theft is defined as to permanently deprive someone of something.  So taking a bike and returning it the next day is, technically, not theft.

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Replying to atleastisoundknowledgable...:
RLI
By lionofludesch
23rd Apr 2014 15:25

Not theft

The Accountant wrote:

Actually theft is defined as to permanently deprive someone of something.  So taking a bike and returning it the next day is, technically, not theft.

Getting the wrong tax code definitely isn't theft.  There's no possibility of depriving HMRC of the cash - it's just a timing difference.

For me, it's about whether I'm comfortable with the degree of the error in the estimate.

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By Peter Tucker
19th Apr 2014 12:28

PAYE Code Numbers

In the rush to bring PAYE into the 21st century some individuals have overlooked the first principle of PAYE which is that a PAYE Code Number is based on an estimate of a Taxpayers net tax free allowances and an estimate of a Taxpayers taxable income for the year in question. The estimate is calculated by HMRC based on the information they hold / provided to them. If a Notice of Coding is issued, it can be appealed by the Taxpayer on the grounds that the figures used in the estimation are incorrect. It is very unfortunate that this simple logic is not known by so many HMRC employees.

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By Marion Hayes
19th Apr 2014 12:39

EIS

Before you can claim any tax relief the investment must have been made, the company must have fulfilled the necessary criteria and then issued you with the relevant certificate.

Then you can request an adjustment or, more likely, you will be past the end of the relevant tax year anyway so will be claiming a refund 

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By tebthereb
20th Apr 2014 12:03

Locutus wrote:You're thinking

Locutus wrote:
You're thinking too much. Just use the code you are given. That is all you are required to do.

Are you thinking I am an employer or acting for an employer? To confirm, that is not the case. I am talking about when acting for individuals where as part of dealing with their tax affairs you check their coding notices for them when they forward them on.

Old Greying Accountant wrote:
... firstly, if the information the code is based on is false, it has presumably come via you, the agent, so you have a potential MLR issue.

Secondly, ask the client, if I get one that is obviously too high I will write and ask the client and make clear they will have a liablity to pay the following year (give an estimate). Too many clients are happy to take the cash-flow advantage but will blame you when they get the big bill later! It is their tax code, let them decide, but make sure they have all the facts.

Many thanks for the reply.

What I was wondering though is whether merely highlighting the issues to the client here is technically sufficient?

It feels like telling a client "your code is too generous, but lets just leave it as it benefits you and the tax will be collected later" is being complicit in them underpaying tax at source, even if the issue is only a matter of timing and the tax will later be collected in full.

I feel like HMRC or the law must have a view on that (I just can't find it)?

I am not thinking about agent supplying false information. I am talking about where either HMRC issues a code based upon past facts that are now irrelevant. Or where the client tells us or HMRC to get a code changed to get a cash-flow advantage (i.e. they say they will make a pension contribution and to adjust code for this, but they don't make the contribution - and they do this every year for example)

Marion Hayes wrote:
Before you can claim any tax relief the investment must have been made, the company must have fulfilled the necessary criteria and then issued you with the relevant certificate.

Then you can request an adjustment or, more likely, you will be past the end of the relevant tax year anyway so will be claiming a refund

Thanks for your comment too, Marion.

So you are saying that if, at 6 April 2014, you are expecting to make an EIS investment later in, say, March 2015 you can only have your coding notice adjusted for this once certificates issued etc in March?

If possible can you please point me towards any further details verifying this as it seems odd to me that you could get increased allowances through PAYE for an expected pension contribution but not an expected EIS investment. With either, if the allowance proves too much/little then this would be dealt with via SA anyway.

I looked at HMRC's manuals which didn't seem clear on this matter and made me think along the lines you have mentioned, but it seems unfair.

Peter Tucker wrote:
In the rush to bring PAYE into the 21st century some individuals have overlooked the first principle of PAYE which is that a PAYE Code Number is based on an estimate of a Taxpayers net tax free allowances and an estimate of a Taxpayers taxable income for the year in question. The estimate is calculated by HMRC based on the information they hold / provided to them. If a Notice of Coding is issued, it can be appealed by the Taxpayer on the grounds that the figures used in the estimation are incorrect. It is very unfortunate that this simple logic is not known by so many HMRC employees.

Personally I am well aware that a coding notice is just based on estimate.

To confirm though, it seems to me like an estimate is open to abuse in order to get a cash-flow advantage.

I want to know how that abuse is policed if at all given that it ultimately doesn't affect the tax LIABILITY and merely the COLLECTION of tax based on expected liability.

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By Peter Tucker
21st Apr 2014 00:30

Policing ?

As mentioned, the PAYE system is based on estimates which are intended to ensure that at the end of the year the correct ( or as near as possible ) amount of Income Tax is collected.

HMRC take the view that any Individual can appeal against their PAYE Coding for whatever reason, but the actual calculation of Income Tax due for any particular year will be accurately computed by HMRC at the end of that particular year. The fact that this calculation may be called “an informal calculation” is said by many to be due to a major failure by HMRC to understand their own business, Income Tax being an annual tax, not a weekly or monthly tax.

It would appear that regrettably HMRC are no longer focusing on annual review of liability for cases other than those falling within the provisions of Self Assessment, and therein lies a problem.

The fact that one suspects that a PAYE Code Number is inaccurate is not something that is legally reportable. The fact that one has claimed some allowance or deduction which is wrong is “reportable”.

It is said by many that HMRC’s current modernisation of PAYE, which appears to rely entirely on the development of more digital transmission, shows an astonishing lack of business understanding by HMRC.

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Replying to Bobbo:
By tebthereb
21st Apr 2014 09:36

Peter - PAYE or SA?

Peter Tucker wrote:
The fact that one has claimed some allowance or deduction which is wrong is “reportable”.

Are you talking about claiming the allowance through PAYE or Self-Assessment here though? Or both?

It is the former which I am interested in hearing more about. Do you know of any legislation or HMRC guidance covering claiming allowances incorrectly through PAYE?

 

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Replying to legerman:
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By Peter Tucker
21st Apr 2014 14:54

If a claim to an Allowance is made by an Individual, to which the Individual is not entitled too in law, then there is an offence.

If HMRC fail to properly compute an Allowance or Deduction – e.g. BiK for £300 instead of £600, then there is no obligation on the part of the Individual to notify HMRC.

When one considers the vast number of failures in PAYE Code calculation by HMRC, resulting in claims under ESC A19 over the past few years.

There is also the regrettably situation where HMRC “calculated” that some Taxpayers were in receipt of Company pensions which combined with the State Pension gave an income total which was less than the standard Personal Tax Free Allowance. HMRC proceeded to remove these cases from their computer records. When the National Audit Office reviewed the situation and discovered that many of these removed cases were in receipt of other additional income, giving rise to a loss to the Treasury estimated at around £430 million in tax, guess what? HMRC blamed the Company Pension payers, but recovered none of the estimated £430 million. You can do quite a bit for the country with £430 million?

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Replying to ChrisKH:
By tebthereb
23rd Apr 2014 06:06

Peter

Peter Tucker wrote:
If a claim to an Allowance is made by an Individual, to which the Individual is not entitled too in law, then there is an offence.

If HMRC fail to properly compute an Allowance or Deduction – e.g. BiK for £300 instead of £600, then there is no obligation on the part of the Individual to notify HMRC.

Sorry if I am being a little slow, but what offence has been committed specifically and what is the penalty?

You are talking about Allowances given at source via PAYE, right? I know the penalty regime in place for errors on SA returns etc, but I am not sure what legislation would apply where an allowance is misstated for PAYE, and then shown correctly on the SA return?

Where is it written that a client is not obliged to tell HMRC about an error where HMRC fail to calculate the Allowance (under PAYE)? The coding notices certainly say to tell them.

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By Marion Hayes
21st Apr 2014 07:01

Not ambiguous really
VCM14150 - EIS: income tax relief: company and investor procedures: investor claims: conditions

ITA07/S203

An investor who wishes to claim relief in respect of a subscription may do so where the following conditions are satisfied:

the investor must have received from the company form EIS3, which certifies that the company has not, so far, breached any of the conditions for being a qualifying company,the investor must not, by the date of the claim, have breached any of the conditions for being a qualifying individual eligible for relief in respect of the shares,the company must have carried on the trade (or research and development) for which the money was raised for 4 months, except where it was unable to do so by reason of having gone into receivership or liquidation. (In practice, the investor will not receive form EIS3 until this condition is satisfied.) 

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By Marion Hayes
21st Apr 2014 07:07

The manual goes on to say:
VCM14160 - EIS: income tax relief: company and investor procedures: investor claims: method of

Relief for a year should normally be claimed on the tax return for that year. Where, however, the tax return has already been made and a claim, or an additional claim, falls to be made, the return should be either amended or, if it is too late to amend it, supplemented by a ‘stand-alone’ claim, preferably made using the claim section of form EIS3 (or the form EIS5 if the investment is made through an Approved Investment Fund). 

*********

Investors who wish to obtain relief for an investment for the current year without waiting for the year to end can effectively do so by requesting a change to their code number (using the claim section of form EIS3 or form EIS5) or by claiming a reduction in a payment on account.

In no circumstances can a claim be made, or a coding adjustment made, or a payment on account reduced, before the investor has received form EIS3 or form EIS5. Forms EIS3 can only be obtained from the company issuing the shares, and are only supplied to a company submitted a satisfactory statement on form EIS1 in respect of the share issue in question. 

Thanks (2)
By Marion Hayes
21st Apr 2014 07:14

@tebthereb

Posted above the extracts from the Venture Capital Manual.

The reason, if I remember rightly, for these methods to be introduced is that there are actually many companys who get an investment and then fail to meet the necessary criteria so relief is never due.

Practically, an investment in a new enterprise in March 2015 would not meet the 4 months trading condition till well past the tax year so you would not get the EIS3 till much later.

Moving on to pensions I had always understood that pension reliefs in a code number should initially only be based on annual premiums  not a possible premium and I have always waited for the payment certificate before requesting a code change. In your situation I would expect the first time you were asked that you could give the client the benefit of the doubt but once you were let down I would not allow it again.

A year is a long time in changing circumstances.

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By tebthereb
21st Apr 2014 09:26

Marion - thanks

Those manuals are exactly what I was looking for on the EIS point.

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By slipknot08
23rd Apr 2014 13:06

NoC / professional conduct in relation to taxation (Feb 2014)

I agree with the above posters - the notice of coding is an estimate of the position (albeit refined as further information becomes available during the year - and with the advent of RTI, presumably, large errors should start to reduce anyway).

You should bring this to your client's attention, as he may well rather pay his tax in monthly instalments via PAYE, rather than as a large bill, despite the perceived cash flow advantage.

When considering your position, you could do worse than read through section 5 of the code of conduct. You will need to assure yourself that the client hasn't deliberately given incorrect information (ie understating estimated income levels, or overstating estimated allowable expenses), as this may point to errors in the returns themselves, and to an 'attitude' on the part of the client, which might require you to further consider your position.

Even so, remember that the due date for the payment of tax is 31 January following the year of assessment, and indeed that you can refuse to have 'other income' included in your tax code, ie you are allowed - within the rules - to minimise the amount paid monthly via PAYE, so provided the tax due is paid by the due date, there is no question of 'potential lost revenue' on which a penalty could hang.

But, if HMRC has come up with an incorrect code, despite holding the information necessary to have issued a correct code, you as the agent are under NO obligation to bring this to HMRC's attention. Indeed, the tax effect of the adjustment may be de minimis (under £200 for these purposes) in which case, again, you are not required to take any action.

You also need to consider the duty of confidentiality you owe your client - if, when you have brought an issue to his attention, he does not give you permission to approach HMRC, then you cannot do so.

What you DO have to do, if there are underlying 'issues' (as well as the coding/cashflow position, which it appears might be the case here) and the client refuses to let you set the position straight with HMRC, is consider making a money laundering report, and - again following the process in the code of conduct - whether you can continue to act.

Thanks (1)
Replying to atleastisoundknowledgable...:
By tebthereb
23rd Apr 2014 22:32

So.. no penalties for client overstating allowances via PAYE?

slipknot08 wrote:
...

Thanks, this is more along the lines of what I am looking for.

In conclusion it seems that there is no penalty for a client making their code too generous - provided their tax return is correct, tax paid by 31st Jan, etc?

I accept as agent we have to be vigilant etc. To confirm, I am only thinking about hypothetical situations so no underlying issues.

Doesn't it seem odd to anyone else that a client can do this without any consequences for them? Isn't there a flat rate penalty regime that catches giving incorrect information in this sort of situation?

I find it difficult to see HMRC pursuing the "theft" route that has been mentioned, even if it could be applied and even if the client admitted they had fabricated their code.

Sorry to go on, I guess I am kind of surprised I don't see more clients supplying "estimates" to HMRC to get a cash-flow advantage if there is no penalty for that estimate being hot air.

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By User deleted
23rd Apr 2014 16:46

Disagree ...

... if a client has deliberately mistated benefits which should be deducted from their tax code the treasury has to borrow more, at a cost, and is therefore permanently deprived on that money.

That is completely different to submitting a correct P11d and HMRC not acting on it, in which case there is no compunction to notify them, although the client may wish to rather than have a big catch up later.

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The triggle is a distant cousin of the squonk (pictured)
By Triggle
23rd Apr 2014 23:33

Have you not heard about the 20% rule?

HMRC will catch up with them sooner or later.

 

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Replying to Jennifer Adams:
By tebthereb
24th Apr 2014 22:05

20% rule?

Triggle wrote:

Have you not heard about the 20% rule?

HMRC will catch up with them sooner or later.

If I am honest, no, I don't know what you are referring to?

 

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By ianthetaxman
24th Apr 2014 09:22

Many years ago, I had to know what theft meant - the definition was:

'to dishonestly appropriate property belonging to another with the intention of permanently depriving the other of it"

 

You had to meet all aspect of the definition for it to be theft (it's a fair cop, guv), so as The Accountant says, giving the bike back might not be theft....

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By slipknot08
25th Apr 2014 16:13

20% rule

SI1996/1654 (as amended) - payments on account of the following year's tax are required to be made (50% - with the balancing payment for the prior year - during the year on 31 January, and 50% following the end of year in question on 31 July) if -

(a) less than 80% of the taxpayer's tax for the current year is deducted at source (ie more than 20% isn't - the 20% rule; so, if not enough is coded out, he could be in danger of exceeding this amount, and obtaining a severe cashflow disadvantage), or

(b) the amount that would have to be paid on account is more than £1,000 (so you don't come into the POA regime if >80% of tax is deducted at source, or the POAs as calculated are <£1,000).

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Replying to Wanderer:
RLI
By lionofludesch
25th Apr 2014 18:54

20% rule

slipknot08 wrote:

SI1996/1654 (as amended) - payments on account of the following year's tax are required to be made (50% - with the balancing payment for the prior year - during the year on 31 January, and 50% following the end of year in question on 31 July) if -

(a) less than 80% of the taxpayer's tax for the current year is deducted at source (ie more than 20% isn't - the 20% rule; so, if not enough is coded out, he could be in danger of exceeding this amount, and obtaining a severe cashflow disadvantage), or

(b) the amount that would have to be paid on account is more than £1,000 (so you don't come into the POA regime if >80% of tax is deducted at source, or the POAs as calculated are <£1,000).

Surely that's the 80% rule.  20% is never mentioned.

The point was made very early in the thread that codings don't affect your liability - only the timing of the payment.

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