Tribunal hits wrong note in Bell redundancy appeal
Laura Bell was made redundant twice, and on both occasions she was liable to pay further tax in respect of her termination payments. HMRC attempted to collect the additional tax due.
In her first tier tribunal (FTT) appeal against tax liabilities arising from underpayments in PAYE tax (TC07820), Bell argued that her employer had made a mistake in their calculations.
The redundancy payments
Bell was made redundant on two separate occasions from the NHS, where she worked as a consultant. In 2009/10 she received £180,056 as a redundancy payment and a further payment for redundancy in 2012/13.
As a result of her first redundancy payment, her income for 2009/10 was £180,056 and she lost her personal allowance. There was an underpayment of tax £22,214.45 for that year and as HMRC was unable to collect that amount through her PAYE tax code, it issued Bell with a tax return for 2009/10 in August 2011.
Bell completed and submitted that return on 24 January 2014, which confirmed the underpayment, that HMRC had previously determined.
On 6 April 2013 HMRC issued a tax return for 2012/13. The completed return was submitted to HMRC on 20 September 2013 which determined an underpayment of tax of £3,243.
Bell failed to settle the outstanding debts by the due date, drawing the attention of HMRC’s debt management team in April 2014.
By April 2017 the debt management office issued a warning of bankruptcy as the taxpayer failed to meet the agreed payment terms. Bell felt she was being harassed and treated unfairly by HMRC.
Reasons for appeal
Bell appealed to HMRC on the basis that her employer had failed to deduct the appropriate tax under PAYE. She also stated that the payment made in March 2013 related to a payment in lieu of notice for the next six months, so the tax should have been assessed in the 2013/14 tax year rather than 2012/13. However, the court determined that her employer had made a lump sum payment on the termination of her employment.
HMRC treated the appeal as being against penalties as it did not consider it possible to appeal against an outstanding tax liability. As the employing entities had ceased to exist, it was not possible to gather information on the two redundancy payments.
The FTT confirmed that the taxpayer could not make an appeal against the additional income tax liabilities arising from her two redundancy payments, which were both determined via her self-assessment tax returns.
This case highlights two important points:
Proof of deductions - It is essential to retain sufficient information on payments received from employers and to understand the nature of the payments being made. If the payment relates to a termination of employment, then remember that the rules on termination payments have changed in recent years and so it is key to understand the nature of the payments being made. Generally, payments and benefits received on termination of employment are taxable when they are received.
How tax is collected - The case did not explore how the tax due under PAYE could be collected, either from the employer or directly from the employee. In the majority of cases, the PAYE regulations ensure that employees can take into account credit on amounts deducted by their employer. Under the PAYE regulations (Regulation 72 and Regulation 81) an employee would only be liable to tax if the following conditions were met:
- The employer can prove that they had taken reasonable care to comply with the regulations and that the failure to deduct the excess was due to an error made in ‘good faith’; and
- HMRC are of the opinion that the employee has received relevant payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments.
However, Finance Act 2003 introduced new legislation (s 684(7A)(b) ITEPA 2003) that allows HMRC to exercise discretionary powers to disapply the PAYE regulations, thus removing the burden from the employer and permitting the tax department to seek the tax directly from the employee.
HMRC stated that in most appropriate cases, it will seek to use Regulation 72 and 81 to collect tax from an employee rather than from an employer.
Where an individual has participated in arrangements that HMRC considers disguised remuneration, then an officer may take a decision to invoke s 684(7A)(b).
The first tier tribunal struck out the decision on the basis that the dispute raised by Bell could not be appealed.
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Reshma Johar is a Tax Consultant at Carter Backer Winter. She is both ATT and CTA qualified with experience gained from practice and her involvement with the CIOT. She has a particular interest in OMB and private client taxes.