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Take appeal to the Tax Tribunal

PAYE Dispute - My client the innocent party ?

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I would be grateful for some advice on a PAYE dispute with HMRC.

An employee worked for my client as her second job. She completed a starter form saying it was her second job and this was forwarded to the Payroll Bureau. The Full Payment Summary (FPS) for the month the employee joined recorded a BR code against her salary BUT HMRC advise the payroll bureau also stated that the employee submitted a starter form stating this was her only job. The Payroll Bureau stated it would be surprising if this happened but are unable to check this so we are reliant on HMRC's word on this. HMRC advise they reacted to the starter form and not the FPS and issued a PAYE coding notice of 1185L so no tax was deducted from the employee for this second job for the whole of the tax year.  HMRC did initially chase the employee for the tax owed but the employee appears to have put up a strong argument why she did not owe the tax and HMRC gave up (they issued her with a gift voucher no less !!) and instead went after the employer for failing to operate a PAYE system incorrectly.

Our argument is that under RTI HMRC should be on top of payroll queries and their software should be showing a conflict between a 1185L PAYE code and a person having a second job. The Payroll Bureau state that once a PAYE code is issued they accept this. My client, the employer was unaware of these issues but is on the hook for a potential mistake by the Bureau and let's be clear, the employee's decision not to come forward and pay the right amount of tax.

HMRC have rejected our appeals to date but is there sufficient doubt about how HMRC behaved to take this to a tribunal ?  The amount of tax is circa £2,500. I have never done this before, am a sole practitioner and want to assess whether the time and effort is worth it. 

Replies (13)

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By Roland195
11th Oct 2021 09:57

What exactly is the payroll bureau in this case - a department/employee of your client or your own outsourced service?

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Replying to Roland195:
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By willkyne.blueyonder.co.uk
11th Oct 2021 10:04

Hi - The payroll bureau is a third party organisation who invoice my client. I do not run payrolls - hope that helps.

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Replying to willkyne.blueyonder.co.uk:
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By Roland195
11th Oct 2021 10:47

I am not sure why you have gone to such efforts to intercede with HMRC when it seems likely that the fault lies with the payroll provider - they must be able to provide copies of what they submitted to HMRC?

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Replying to Roland195:
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By Paul Crowley
12th Oct 2021 07:23

Agree
If there is error then the error lies with payroll provider.
HMRC claim that payroll provider submitted an inconsistent return
If no second job then why would they apply BR?

A failure yet again of HMRC systems
Coding issued despite RTIs from other employer using a coding?

BR would only collect £2,370

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By Leywood
11th Oct 2021 10:10

What evidence have you received from HMRC regarding their assertion that ''BUT HMRC advise the payroll bureau also stated that the employee submitted a starter form stating this was her only job''
^^^ If this is correct then the payroll company are on the hook.

Surely the payroll company should also provide evidence to prove this assertion is incorrect. Or does their apparent woolly response that they are 'unable to check' indicate that they know they are at fault?

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By Duggimon
11th Oct 2021 10:28

You need the evidence that your client, the employer, submitted the correct starter form to the payroll bureau, and HMRC's evidence that the payroll bureau advised contrary to this form. It is then clear from this that the fault lies with the payroll bureau.

Your client will still be on the hook with HMRC for the tax though, they will have to try and claim the amount by which the employee has been overpaid from the bureau, though really I suppose it is the employee who owes the employer, albeit through no fault of their own.

I have no idea as to the actual legality of reclaiming the overpayment from the employee.

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Tornado
By Tornado
11th Oct 2021 11:06

I think the key point here is that HMRC instruct the Employer (payroll bureau) what code number to use when there is a new employee on the payroll. This is what RTI is designed to do. If the payroll bureau notified HMRC of the new employee and HMRC issued them with a code number to use then the Payroll Bureau is not at fault and just carried out the due process.
It seems to me that HMRC are at fault here and I would certainly appeal based on the information that has been given.

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By Hugo Fair
11th Oct 2021 13:38

1. "An employee worked for my client as her second job. She completed a starter form saying it was her second job and this was forwarded to the Payroll Bureau."
Does your client still have a copy (or even better the original) of this form?
If not, there's a lesson to be learned right there (as that was their evidence).

2. "HMRC advise the payroll bureau also stated that the employee submitted a starter form stating this was her only job."
What that actually means is that the bureau completed details in the FPS indicating those 'facts' (i.e. they didn't advise in the sense of a phone-call or letter or whatever).
Does the payroll bureau have any evidence of the basis on which they entered that data (such as a 2nd version of the starter form from client or from employee)?
If not, they've entered incorrect data and (subject to the T&Cs of their contract with your client) are likely to be liable for making good any costs incurred.

3. "HMRC advise they reacted to the starter form and not the FPS and issued a PAYE coding notice of 1185L."
This makes no sense at all - as HMRC never receive a starter form (from employee or client or bureau) ... just the FPS (in which salient items from the form are captured).

4. "so no tax was deducted from the employee for this second job for the whole of the tax year."
This makes little sense, unless the employee has two distinct taxpayer records within HMRC systems (highly unusual but just possible if an incorrect NINO was used by one of the employers for example). Otherwise the whole point of HMRC's 'real-time' systems is that they can see the multiple concurrent employments of an individual - and issue an in-year Tax Code notice of change.
The only exception is where the first FPS is too close to the end of a tax year (say Feb) for there to be time to issue and implement a new Tax Code. Is that the case here?

5. "HMRC did initially chase the employee for the tax owed but the employee appears to have put up a strong argument why she did not owe the tax and HMRC gave up (they issued her with a gift voucher no less !!)"
I'd love to know the nature of the "strong argument" as that approach has only been known to work with HMRC in 1 of 3 scenarios - impossibility/cost of collection (e.g. taxpayer has fled the country), or vulnerability/inability of taxpayer to comply, or the amount is immaterial (so easiest to write off).
None of those seem likely here, especially if she was hard-nosed enough to extract a gift voucher from them (despite by law being the person liable to pay the tax). Is she by any chance the Director of the company that is your client?

6. "HMRC have rejected our appeals to date"
What appeals (i.e. what procedures have you followed)? And why are you involved at all if you aren't providing PAYE services?

Bottom-line:
* It's not clear whether the initial screuu-up (in terms of starter forms) was made by your client or the bureau - but by default the liability for paying the tax remains with the taxpayer not the employer (as anyone who has completed an SA will know since PAYE is never an exact science anyway).
* Whether or not it's worth your (or your client's) time & money, there are appeal procedures that can be followed with HMRC - but whilst it is feasible that you could overturn any associated interest charges and/or penalties, the chances of getting them to 'drop' anyone having to pay the tax are basically zero.
* So you (or rather your client) are left with trying to resolve which of three parties are prepared to cough up the dosh - which takes you back to who made the initial mistake?
The employee may have ticked the wrong-box (easily and often done) ... or the client may have done that on behalf of the employee ... or the bureau may have entered a wrong value (a transposition error).
If you identify the 'culprit' then you have who needs to pay up (however unfair they feel that to be).
If you cannot then, personally, I'd say the best bet is to agree some split (whether based on affordability or whatever) ... but forget getting HMRC to write it off!

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Replying to Hugo Fair:
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By willkyne.blueyonder.co.uk
11th Oct 2021 14:46

Firstly, thank you so much for taking the time to give such a detailed reply. That is amazing.
Dealing with each of your points in turn.

1. It is evident that the employee did complete the correct section on the starter form.
2 & 3. This is the confusing part. The bureau did complete the FPS correctly but I understand that they should have also prepared in their software details from the employee that it was either their only employment or it was a second job. The bureau advise that it would have been very unusual for the details of the employee to have been entered incorrectly, but they advise me that this record is not retained so cannot be checked.
4. This is the nub of our argument that HMRC should have the capability to identify a problem (notwithstanding what happened in 3 above).The employee joined in June ie Month 3 of a payroll year so timing should not be an issue. And this is the argument that I would like to take to the Tribunal.
5. The person involved is a part time employee and not a director. A feisty character apparently but we are all very surprised that she managed to avoid HMRC's clutches.
6. We have followed HMRC's internal appeal procedures, the final one being to an 'independent' review within HMRC.
7. I am involved as I am the company accountant and I do whatever I can, within reason, to help my client.

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Replying to willkyne.blueyonder.co.uk:
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By Hugo Fair
11th Oct 2021 15:51

Well, good luck.

Although I was at pains in my previous response to avoid assuming too much (let alone allocating blame), it is starting to sound as though the least plausible bit is the Payroll Bureau's explanation.
I don't know what software they use (and might not know exactly how it works even if it is known to me), but:
a) Completing the FPS (correctly or not) isn't usually a separate action ... it is the result of entering data into the Payroll software - which after processing the payroll will, amongst other things, generate the FPS ready to file.
b) If that is the process then it is impossible for 'starter' data to be entered in the payroll with one value, but a different value to be exported via the FPS ... unless the software itself has a serious fault (which would affect all its users).
c) I have no idea what "record is not retained", but I find that response not only dangerously close to unbelievable (and to say the least unusual in professional software) ... it also appears to contravene the legislative requirement to retain relevant payroll records.

Personally that's where I'd focus my attention, especially if the software being used is at all well known (the power of social media and or veiled threats to the CEO that you may have to publicise the failings can be remarkably effective).
Either the software is finely balanced between unusual and rubbish, or the Bureau are feeding you an incomplete (and misleading) story of the events.

Although it'd be lovely to see HMRC squirm whilst trying to justify why they didn't spot the anomaly earlier, they won't roll over ... and will point out (legally not morally) that the wrong data was sent to them - and this was the cause of insufficient tax being collected. Or "not my fault guv" as it's known.

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By Matrix
12th Oct 2021 07:24

I don’t understand why HMRC issued an incorrect tax code after the start of the new employment and failed to correct it during the tax year.

Also why the bureau can’t prove they indeed used a BR tax code. Have you asked for a copy of the first payslip?

If you don’t do this stuff every day then I really don’t think you would be able to help.

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Replying to Matrix:
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By legerman
12th Oct 2021 14:07

Matrix wrote:

I don’t understand why HMRC issued an incorrect tax code after the start of the new employment and failed to correct it during the tax year.

Also why the bureau can’t prove they indeed used a BR tax code. Have you asked for a copy of the first payslip?

If you don’t do this stuff every day then I really don’t think you would be able to help.

This was my thought when reading the post and replies. If the first payslip shows BR then jobs a good 'un and employer is off the hook. They have to go by the coding issued by HMRC. If the payslip shows 1185(W/M1) then the wrong data has been entered into the system. Payroll data has to be kept for 3 years I believe so hopefully still in time and bureau should still have the starter form.

Even if the latter I still think an argument could be made that HMRC issued the wrong code, given that they knew of the of the first job.

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By Ned Ludd
12th Oct 2021 12:45

I'd be taking this the whole way.

It's completely unfair to try and charge the employer an underpayment of tax purely because they can't get it from the employee.

presumably the employee received payslips? She should know that she was underpaying tax on those.

I think this is a case of HMRC trying it on; ask for an internal review and make it clear you'll be going to tribunal.

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