HMRC bungled PAYE for new employee

Sci-Temps Limited is an employment agency and has been an RTI employer since 2014/15.

The relevant facts are as follows:

• A new employee joined Sci-Temps in November 2015, during the 2015/16 year.
• In April 2016, HMRC changed that employee’s PAYE code for the 2016/17 year, requiring a tax code of 303T to be operated on a cumulative basis. Sci-Temps implemented that change.
• In September 2016, following a call with the employee, HMRC changed the employee’s code again from 303T to 1100L.
• At the end of the September notification from HMRC there was the heading “Previous Pay and Tax Details” which stated “Previous Pay” of £3,144 and “Previous Tax” of £0.
• These figures related to the employee’s earlier employment, prior to joining Sci-Temps.
• Sci-Temps changed the employee’s tax code to 1100L, but did not include the previous pay in its deductions working sheet. As a result, the employee underpaid tax of £629 in 2016/17.

HMRC pursues the unpaid tax

HMRC initially sought to collect this sum from the employee; however, she told HMRC that she was not responsible for the underpayment. HMRC then sought to collect the amount from Sci-Temps.

The company argued that it was not expecting HMRC to provide earning figures from an earlier employment and require that those figures be added to its deductions working sheet.

Further, it had assumed the previous pay figure referred to the employee’s current tax year earnings with Sci-Temps. The £3,144 referenced as previous pay was approx. 50% of the expected annual pay of the employee for 2016/17, and the new coding notice arrived in September – almost half-way through that tax year.

In February 2019, HMRC issued a determination under Regulation 80 of the Income Tax PAYE Regulations 2003 to collect the £629, and upheld the determination on statutory review. Sci-Temps notified its appeal to the first tier tribunal on time [TC07796].

Regulation 80 determination invalid

The FTT noted that the determination was made under Reg 80 and that HMRC referred to a failure to comply with Reg 68. However, that regulation only applies to non-RTI employers, and Sci-Temps was an RTI employer.

This meant that HMRC did not go through the process required by Reg 75A and so had not created a deemed liability which could be collected using a Reg 80 determination. This rendered the Reg 80 determination invalid.

Appeal won on other grounds

In spite of the above, the FTT went on to consider whether, as HMRC argued, Sci-Temps had “failed to correctly operate the tax code issued on 9 September 2016”.

As Sci-Temps applied the 1100L tax code issued in September 2016, the FTT found that there had been no failure in this regard.

Further, once HMRC identified that the employee had 2015/16 earnings which had not been taxed, the FTT noted that HMRC could have used its power under Reg 14(1)(d) to change the employee’s tax code to collect the underpaid tax. Sci-Temps would then have been required to use that code in making deductions from the employee’s earnings. However, HMRC did not do this.

Reasonable care

Although the company’s appeal was already successful on the above grounds, the FTT briefly considered the matter of whether Sci-Temps had taken reasonable care to comply with the PAYE Regulations. Again, the FTT found in the taxpayer’s favour.

The FTT found that a reasonable person would know that HMRC has powers to collect tax underpaid in relation to previous year’s earnings by making a change to a person’s tax code. That person would not expect HMRC to direct such a radical departure from those principles, by way of unexplained figures at the end of a coding notice.

Further, the FTT commented that HMRC had sought to rely on guidance from April 2020 when challenging the argument of reasonable care. The judge placed no reliance on the guidance, noting that it was published after all the events under appeal had taken place.

The appeal was allowed.

Comment

This case demonstrates a multitude of errors on HMRC’s part, also keenly demonstrated in the fact that HMRC sent the FTT legislation and regulations as originally published, rather than as they applied at the relevant time. This meant Judge Redston had to locate the legislation and regulations in force at the relevant time herself.