Under the PAYE system, an employer has to deduct tax from an employee’s pay packet and account for it to the Revenue. Sometimes the employer fails to do this, or does it incorrectly. Where this happens, the employee may be required to pay over the tax which the employer has failed to deduct. This may happen:
- where the employer makes an error in good faith despite taking reasonable care to operate the system properly; or
- where the employer wilfully fails to deduct the right amount of tax and the employee knows that he has done so.
Hitherto, there has been no right of appeal against a direction by the Revenue that an employee should pay the tax in these circumstances. All that an employee can do, if they disagree with the direction, is to seek judicial review through the courts. That is a long and expensive process well beyond the means of the majority of employees on modest incomes.
Accordingly, last year, the Revenue decided to introduce rights of appeal in cases where it was alleged that the employer’s failure to deduct was wilful, and that the employee knew of the failure. At that time, they did not propose to give similar appeal rights to the employee who was required to pay because the employer managed to convince the Revenue that they had acted in good faith and taken reasonable care. No fault was to be attributed to the employer, they said; the tax had to be paid; ultimately it was up to the employee to pay.
The cases in which an employee can be made to pay under these rules represent two extremes. At one end of the spectrum, there is the company where there are irregularities, PAYE is not properly operated on a director’s pay, the director knows this but connives at it, the company goes into liquidation still owing the tax – and the Revenue pursues the director. Fair enough, one might say – and fair enough, too, that a director who is in fact innocent should have the chance to prove it on appeal.
At the other end of the spectrum, an ordinary employee, who quite reasonably assumes that their employer is deducting the right amount of tax from their wages or salary, is faced with an unexpected tax bill because their employer has made a mistake in operating the system.
Sally, a peripatetic music teacher employed by a County Council, has – unknown to her – had too little tax and NIC deducted from her salary. This happened because for two successive years, the County Council have used out of date coding notices. On discovering the mistake the Inland Revenue made a direction that Sally should pay the outstanding tax.
The Inland Revenue accepted that the County Council had exercised reasonable care, the amended coding notices for each of the two years having been lost in the post.
We contended that one lost coding was acceptable but to have two years forms lost due to the postal system is at best extremely dubious.
Despite our best efforts the Inland Revenue accepted the County Council’s argument. We would have liked to be able to challenge the Revenue’s belief that the Council had taken reasonable care, but unfortunately we could not at that time because there was no right of appeal.
Sally and others like her might be on modest rates of pay and unable to fund an unexpected tax bill – especially if the error has been perpetuated over a long period, and the tax due exceeds the £2,000 limit for spreading payment through the PAYE code.
With these and other arguments put forward by LITRG and other groups of tax professionals, the Revenue were persuaded that there should be a right of appeal for employees whose employers are excused payment in these circumstances. The necessary rights are to be written into the PAYE regulations and will take effect from the new tax year.
Contact Name: Robin Williamson (Contact tel: 0844 579 6700, Fax: 0844 579 6701)