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New PAYE regs correct Demibourne outcome

The employment status case of Demibourne Ltd v Revenue and Customs Commissioners highlighted a number of potentially expensive tax issues for employers and employees alike which can arise when a worker formerly regarded as self-employed is later reclassified as an employee.

Demibourne confirmed that HM Revenue & Customs (HMRC) do not have the discretion to choose whether to collect tax from the employer or the employee. It led to a situation where HMRC were obliged to seek recovery of tax from the employer in relation to income on which tax has previously been paid by the worker under self assessment.

Subsequently, HMRC have worked with the main bodies of the tax and accountancy profession and business to identify a solution to the issues highlighted in the case. New regulations are being introduced from 6 April 2008 which amend The Income Tax (Pay As You Earn) Regulations 2003 (The PAYE Regulations) to extend the limited circumstances where HMRC may make a direction to transfer an employer’s PAYE liability to the employee who received the relevant payments from which tax has been under deducted.

Broadly, the new power to make a direction will apply where an employer has failed to deduct or account for tax in relation to a relevant payment (payments subject to PAYE as defined in Regulation 4 of the PAYE Regulations), while tax on that payment has been included in the employee’s SA, or where no SA has been made but tax has been paid as SA payments on account, or has been deducted as a sub-contractor deduction.

HMRC have published FAQs on new legislation to transfer a PAYE liability from an employer to an employee.


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Mike Whittaker, 27 March 2008 @ 13:27 PM

Typo
"It lead to a situation " -> "led"