Who should pay PAYE underpayment

[towat]

A new client recently came to me having received an assessment for underpaid PAYE of around £6,000 going back a few years, the HMRC letter explained that his NHS pension provider had used the wrong code and insufficient tax had been collected. So far so good, just another one of these well publicised cases of which we have had several, albeit this was a blatant error by the pension provider not using the tax code supplied by HMRC.

My current question relates to another case where HMRC have written to a client informing them that they (the client) used an incorrect Tax code for one of their employees several years ago and they now must pay the shortfall of around £1,500. The employee in question is no longer employed by the client and it transpires that the form P46 was wrongly actioned by a junior payroll clerk.

This seems inequitable, in one case the taxpayer must pay for the error in the other the employer must pay, surely one of these must be wrong, and if so which one?

[bd6759]

The employer is responsible for the operation of PAYE, and therefore is liable for any under-deduction that arises if they do not take sufficient care to operate it correctly.

[section 44]

what about the individual's self-assessment income tax position?

[Huw Williams]

The taxpayer of course, because he can only claim credit for the tax on his P60

If the same amount gets paid twice, surely we all benefit from the government's deficit reduction

[towat]

what about the individual's self-assessment income tax position?

That was my thought, if the employee had needed to prepare a self assessment then the underpayment would have been paid probably without reference to the employer.

The employer is responsible for the operation of PAYE, and therefore is liable for any under-deduction that arises if they do not take sufficient care to operate it correctly.

I agree but what about the first case where the pension provider was in error but HMRC still expect the taxpayer to pay?

[bd6759]

The taxpayer of course, because he can only claim credit for the tax on his P60

That was my thought, if the employee had needed to prepare a self assessment then the underpayment would have been paid probably without reference to the employer.

Not at all. The law allows/requires any employee to include in their self-assessment any tax that their employer ought to have deducted but failed to do so. If anyone receives a P800 and disagrees with it, they should ask for a tax return and self assess using the tax that ought to have deducted (and refuse to accept any repairs HMRC might do to change that figure). It is then up to HMRC to enquire, and formally make a determination of who is liable to pay the tax (and that is an appealable decision).

Statutory reference is regulation 185 Income Tax (PAYE) Regulations 2003.

185.—(1) This regulation applies for the purpose of determining—
(a) the excess mentioned in section 59A(1) of TMA(a) (payments on account of income tax:
income tax assessed exceeds amount deducted at source), and
(b) the difference mentioned in section 59B(1) of TMA(b) (payments of income tax and
capital gains tax: difference between tax contained in self-assessment and aggregate of
payments on account or deducted at source).
(2) For those purposes, the amount of income tax deducted at source under these Regulations is
the total net tax deducted during the relevant tax year (“A”) after making any additions or
subtractions required by paragraphs (3) to (5).
(3) Subtract from A any repayments of A which are made before the taxpayer’s return and selfassessment
is made under section 8 or 8A of TMA(c) (personal return and trustee’s return).
(4) Add to A any overpayment of tax from a previous tax year, to the extent that it was taken
into account in determining the taxpayer’s code for the relevant tax year.
(5) Add to A any tax treated as deducted, other than any direction tax, but—
(a) only if there would be an amount payable by the taxpayer under section 59B(1) of TMA
on the assumption that there are no payments on account and no addition to A under this
paragraph, and then
(b) only to a maximum of that amount.
(6) In this regulation—
“direction tax” means any amount of tax which is the subject of a direction made under
regulation 72(5) or regulation 81(4) in relation to the taxpayer in respect of one or more tax
periods falling within the relevant tax year;
“relevant tax year” means—
(a) in relation to section 59A(1) of TMA, the immediately preceding year referred to in
that subsection;
(b) in relation to section 59B(1) of TMA, the tax year for which the self-assessment
referred to in that subsection is made;
“tax treated as deducted” means any tax which in relation to relevant payments made by an
employer to the taxpayer in the relevant tax year—
(a) the employer was liable to deduct from payments but failed to do so, or
(b) the employer was liable to account for in accordance with regulation 62(5) (notional
payments) but failed to do so;
“the taxpayer” means the person referred to in section 59A(1) of TMA or the person whose
self-assessment is referred to in section 59B(1) of TMA (as the case may be).