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BKL Tax highlights a recent tribunal case concerning the application of PAYE and the incidence of Income Tax when an insuffient amount is deducted.

Introduction

The First-Tier Tribunal case of Burton v HMRC [2009] TC 00263 is a useful reminder of what happens when PAYE goes wrong.

Mr Burton was an employee. He found that the tax deducted by his employer was less than the tax payable on his income. He was upset that HMRC were asking him to pay the difference.

The Rules for PAYE

The basic rule is of course that accounting for tax under PAYE is the employer's problem; an employee is entitled in his Self-Assessment return to take credit for tax which an employer was liable to deduct regardless of whether the tax has in fact been deducted. The circumstances in which the employee can be held liable are limited - broadly if the employee was complicit in his employer's wilful failure to operate PAYE; or if the employer took reasonable care and made an error in good faith - but neither of those circumstances was argued by HMRC to apply in Mr Burton's case. So why did he lose?

Tribunal Findings

The answer lies in the detail of PAYE. Simply, Mr Burton could not show that he had given his employer a P45 or signed a P46. Accordingly, the Tribunal held that the employer had, in operating code BR, done exactly what the PAYE regulations required: there had been no liability on the part of the employer to account for any tax beyond basic rate and therefore nothing beyond basic rate to be credited in Mr Burton's self-assessment.

Conclusion and Guidance

The moral for employees is that you, too, have some obligations under PAYE: at the very minimum, when you start with a new employer, make sure that you hand over a P45 or sign a P46 (and keep a record!) and check that your payslip reflects the code which has been issued to you.

Extra-Statutory Concession A19 (ESC A19)

It's also worth mentioning in this regard ESC A19. This is the concession whereby (broadly) HMRC may write off arrears of tax where the arrears are due to a departmental failure to make timely use of information and the taxpayer could reasonably have believed his or her affairs to be in order. This might apply when an employer makes an error in good faith, resulting in an under-deduction of PAYE tax which may in principle be recoverable from the employee (it clearly couldn't apply where the employee is complicit).

But ESC A19 won't normally be available to people to whom HMRC issue a tax return annually: the logic being that the requirement of the concession that a taxpayer is "notified of the arrears more than 12 months after the end of the tax year" will never be fulfilled, the taxpayer having (in effect) been notified in his self-assessment tax calculation not later 31 January following the end of the tax year! We think "Catch 22" is probably the technical term for this.