Directions under PAYE regulations 42 and 49

Published on 20 January 2004

Response by LITRG to Technical Paper issued by the Inland Revenue in April 2003

The Low Incomes Tax Reform Group is the part of the Chartered Institute of Taxation that seeks to represent the interests of people on low incomes, who are unable to afford a professional adviser, in their contacts with the tax system. We respond to this technical paper mainly from the point of view of employees on low pay.

We are very encouraged by these proposals to give rights of appeal where none existed before. The only ways in which decisions under 42 and 49 of the PAYE regulations can be challenged at present are cumbersome and expensive, well beyond the reach of the unrepresented taxpayer, so this proposal to introduce proper rights of appeal will greatly improve access to justice in this complex area.

Having given rights of appeal, it is important to be clear about where the burden of proof lies. In our view the suggestion that the Revenue should not be required to prove underlying issues such as 'knowledge' and 'wilful default' in reg. 42(3) and 49(5) cases leaves the person against whom such things are alleged without the means to put the person alleging them to the proof. We do not see how a fair appeal system can operate without the Revenue being required to prove their contention that the employer had wilfully defaulted, or the employee had received income knowing of the default.

But where we chiefly differ is in the treatment of the employee whose employer has been excused liability under reg. 42(2). In these cases we believe strongly that the employee should have a right of appeal. Otherwise, the effect on him would be to impose a liability which he did not expect and had no reason to expect. Or it may be that the employee can show that the employer did not act in good faith, or did not take reasonable care. If either were proved, it would exonerate the employee, who should therefore be given the chance of an appeal.

Finally, the issues in any appeal under these provisions are bound to be complex and technical. Yet many of those affected will be unable to afford professional representation, and we believe that the interests of justice will require that they should be given free legal assistance.

We give below our responses to the specific questions in the technical paper.

Reg. 42(3) and 49(5)

9.1 Do you agree there is a need for a right of appeal by the employee in relation to a direction under regulation 42(3) or 49(5)?

9.2 Do you have any comments on the proposals for how such a right of appeal would operate?

'A warning letter is sent to the employee . . . asking for any evidence that tax was deducted'. There is an important question here about the burden of proof. The usual scenario would be for the employer to deduct tax before paying the employee, and the employee is prima facie entitled to assume that everything is in order. We suggest that it is for the Revenue to show that tax was not deducted, not for the employee to prove the contrary.

9.3 Do you agree there is no need for a right of appeal by the employer in relation to a direction under regulation 42(3) or 49(5) (other than already provided in relation to a determination under regulation 49)?

So far as reg. 49 is concerned, we agree that the existing right of the employer to appeal against a determination under reg. 49(7) should be sufficient protection. But with regard to reg. 42(3), we think that if an employee succeeds in an appeal so that the tax liability reverts to the employer, natural justice would require the employer to have some recourse. This would probably best be exercised by joining the employer in the appeal proceedings and affording him separate representation.

9.4 Do you have any comments on the proposals for a right of appeal for employees in relation to directions under regulation 42(3) or 49(5)?

As is stated in para. 8.6, the employee will be able to appeal against:

  • the making of the direction; or
  • the amount of tax to be recovered under the direction.

Appeal against the making of the direction could be on one or more of the following grounds:

  • the employer did not wilfully fail to deduct tax; i.e. was the error innocent or even careless as opposed to wilful; or
  • even if the employer's failure to deduct was wilful, the employee did not know this when he received the income. Bear in mind that 'knowing' (as we are reminded in para. 7.6) is used in an objective sense, not as 'ought to have known' or 'should have been suspicious'. The distinction is important as the fact that the employee is usually a director in these cases will often raise at least the suspicion that he ought to have known of the failure.

The burden of proving an allegation should in all cases rest on the person making it, unless there are special circumstances pointing the other way. If the Revenue are alleging wilful failure to deduct on the part of the employer, or that the employee received income knowing that to be the case, the burden would be on the Revenue to prove it in any appeal proceedings. It is therefore hard to see how the Revenue could avoid being required to 'prove formally underlying issues regarding "knowledge" and "wilful default"' (para. 8.8). Any appeal by the employee must enable the appellant, at the very least, to put the Revenue to the proof of their allegation that he has received income knowing of the employer's default.

We agree that limiting the appeal to 'whether the Inland Revenue could or could not reasonably have made the decision' would be inadequate (para. 8.10), particularly if the standard of proof of unreasonableness were to be as stringent as that used in judicial review proceedings.

Certainly the Commissioners should be able to substitute their judgment for that of the Inland Revenue (para. 8.11), though we are unclear how this would avoid requiring the Revenue to prove formally issues regarding knowledge and 'wilful default'.

Reg. 42(2)

13.1 Do you agree there should be a right of appeal for employers against refusal of a collector to make a direction under regulation 42(2)?


13.2 Do you have any comments on the proposals for how an employer?s appeal right under regulation 42(2) would operate (as in paragraph 10.4)?

We have no objection to the procedure envisaged here, except that if there is to be an employee's right of appeal (and we strongly believe there should), the direction Notice to the employee (fourth bullet point under para. 10(4)) should clearly set this out.

13.3 Do you agree it would not be appropriate for employees also to have a right of appeal against a direction under regulation 42(2)?

We profoundly disagree with this proposition. The effect of a reg. 42(2) direction on the employee would be to impose on him a liability which he did not expect and had no reason to expect. If the bill came to more than £2,000, he could even be required to pay without the benefit of coding out over three years. The effect of such a direction on an employee on a low income could be disastrous, pushing him further into poverty and debt. Taking such action against a citizen without giving a right of appeal in our view risks infringing the European Convention on Human Rights, First Protocol, article 1 (Protection of Property).

Moreover, Inland Revenue administrative practice has always recognised the unfairness of enforcing a tax debt in cases where the debtor had every reason to suppose that their tax affairs were in order, and the Revenue had done nothing to displace that belief. Extra-statutory concession A19, where the Revenue remit arrears of tax in certain circumstances where the taxpayer has given the Revenue all necessary information and reasonably believes his affairs are in order, is an illustration of this.

Against that, it could be argued that judicial review is already available. But such a remedy is way beyond the means of most individual employees, unless they are supported financially (e.g. by their trade union); and even then, the Revenue?s judgment can only be overridden by the court on very limited and stringent grounds.

If the employee were given a right of appeal against a reg. 42(2) direction, what would be the possible grounds of appeal under the existing rules? We set these out below:

  • against the Revenue?s finding that the employer acted in good faith;
  • against the Revenue?s finding that the employer took reasonable care;
  • against quantum (i.e the amount of tax due).

In addition, it would be in accordance with the rules of natural justice, and with the Revenue's administrative practice in other areas (as shown above), if the employee were given a further ground of appeal:

  • That even if the employer had acted in good faith, and had taken reasonable care, the employee could not reasonably have known that the right amount of tax was not being deducted, had not withheld any required information from the Inland Revenue, and could reasonably have believed that his own tax affairs were in order.

To remit arrears of tax on this final ground would be no different in principle from the existing practice, under extra-statutory concession A19, of remitting arrears of tax which the taxpayer reasonably believed had been settled.

Finally, various points were made in the Technical Paper, against granting a right of appeal for employees, which are in our view questionable.

  • In 5.5 it is argued that 'directions under regulation 42(2) have not been controversial . . . it is very rare for an employee not to accept the position once a direction has been made.' This is hardly surprising given that there is at present no right of appeal, and therefore no option but for the employee to accept the position.
  • In 11.3 it is suggested that the employer should be excused PAYE if he under-deducts while taking reasonable care and acting in good faith, and then the liability must then fall on the employee since somebody has to pay the tax. But if the employer, who has the primary responsibility to account for the tax due, is excused that responsibility where he has acted in good faith, then surely the employee, who does not have the primary responsibility under the PAYE system, should equally be excused provided that he too has acted in good faith? Fairness as between taxpayers is not served by offering to one taxpayer the chance to excuse himself, but not the other. And if the employee has not acted in good faith, the case would be inappropriate for a reg. 42(2) direction anyway.
  • In 11.4 it is stated that 'the employee does of course have the usual appeal mechanisms available to establish the correct amount of tax payable on total annual income'. But the appeal mechanisms under discussion here are those that determine the correct amount that should be deducted, now, under PAYE, not the correct amount of tax that should finally be paid over the course of the tax year.
  • In 11.5, 'an appeal right for the employee under regulation 42(2) would undermine the idea of equity between taxpayers and would present the opportunity for an unwarranted tax windfall'. This is no more the case here than it is under the analogous situation envisaged by extra-statutory concession A19 (see above).
  • Again in 11.5, 'unless steps to the contrary were taken, it would also remove the assurance enjoyed by employers that once a direction is made any under-deduction is no longer their liability'. This, in our view, is a particularly weak argument. If the employee has successfully challenged the finding that the employer has taken reasonable care and acted in good faith, it will mean that the employer has failed to demonstrate reasonable care or good faith. In such circumstances, the employer hardly deserves to enjoy any such assurance.
  • In 12.3, 'we question whether an employee would be in a position to judge the issue or provide evidence of the employer not taking reasonable care or acting in good faith'. If this is not a pre-judgment of the issue designed to oust the jurisdiction of the courts, we do not know what is. Surely the purpose of having a right of appeal for the employee would be to find out whether the employee could provide such evidence, and an appeal on those grounds would only happen if an employee believed the evidence was there.
  • Similarly, the arguments in 12.4 and 12.5 seem based on the premis that there should be no right of appeal for the employee, because the employee might not have any evidence to produce. This begs the very question, which it is the purpose of an appeal to settle. If the Revenue are worried about the time and costs incurred in frivolous and vexatious appeals, they might wish to consider whether the Commissioners should have power to make a preliminary award of costs. The risk that some appeals might be frivolous or vexatious should not be adduced as an argument against having any right of appeal at all. The proper way to guard against abuse of a right is to bring in measures targeted on the abuse, not to eliminate the right itself.

13.4 Do you agree that, if both the employer and employee enjoy appeal rights, the employee should be enjoined in an employer's appeal (and vice versa), and where an appeal succeeds the liability will transfer to the other?

If an employer appeals successfully against the refusal of the Revenue to issue a reg. 42(2) direction, the employee should have the opportunity to contest the employer's appeal. Equally, if the Revenue accept the employer's word that he has taken reasonable care and acted in good faith, and consequently issue a direction, the employee should have the opportunity to appeal.

However, the employee should represent himself or be separately represented in view of the likelihood that if the employer's appeal succeeds, the issue will be between the Revenue and the employee. For that reason it is inappropriate that the employee's sole opportunity to present his case should be as a witness for the Revenue (see para. 10.6). It is also possible that the employee will not contest the employer's grounds of appeal, but will wish to argue his appeal on grounds of quantum, or that he should be excused payment of a tax debt that he had every reason to believe had been settled (see our response to 13.3 above). In either of those cases it would be essential for the employee to be represented independently of the Revenue.

13.5 If there is an appeal for employees should the employer be indemnified against a successful appeal?

If the employee successfully appeals on the grounds that the employer did not exercise reasonable care or did not act in good faith, then there is no reason why the employer should be indemnified, as the argument that the employer should be excused payment of PAYE will have failed.

If the employee successfully appeals on one of the other grounds outlined above, and nothing has disturbed the finding that the employer took reasonable care and acted in good faith, then both the employer and the employee will be excused the tax. In such cases an indemnity for the employer would be otiose.

LITRG 08 July 2003