COMPLIANCE
For the record Justine Riccomini FFTA AIPA Chartered MCIPD ChFCIPP, head of taxation at the Institute of Chartered Accountants of Scotland (ICAS) explains why an employer who didn’t keep proper records had to pay arrears of pay as you earn (PAYE) and penalties for failure to make PAYE returns, even though no PAYE would otherwise have been due. Do you have clients like this?
This tax case, known as the Hedges case, which was heard at the FTT in November 2021, is not a big hitter in terms of money. In fact, the amounts claimed as due by HMRC in PAYE and penalties amounted to less than £16,000. The decision was handed down in March 2022 and can be found here: http://ow.ly/lhgU30sowuw. However, it’s not money that matters here – it’s the principle, and the often-underestimated power of the PAYE Regulations. The PAYE Regulations are normally very good at placing the burden firmly in the employer’s lap when it comes to not only operating a payroll, but also proving they’ve carried out the right processes when it comes to operating PAYE. The Employer’s Further Guide to PAYE sometimes fails in its use of simplistic language to convey the serious nature of the record-keeping requirements – and attention must therefore be paid to every subtlety. In this case, none of the employees concerned earned enough to pay any PAYE. So, how did the employer end up getting their knuckles rapped and presented with a bill for four years’ PAYE arrears and penalties? Main points ● a pub manager failed to keep any formal records for his employees ● Her Majesty’s Revenue and Customs (HMRC) levied arrears of PAYE and non-filing penalties under Regulation 80 of the Income Tax (PAYE) Regulations 2003 ● although the employees hadn’t earned enough to pay any PAYE, the first-tier tribunal (FTT) found in favour of HMRC, subject to some minor computational amendments.
Background The Farmhouse public house in South London found itself under the scrutiny of an employer compliance review. The compliance officer discovered that Hedges, who was the manager of the pub, had been employing staff without maintaining the required standard of records as described in the Employer’s Further Guide to PAYE . What was he doing wrong? The compliance officer established that, although the employees didn’t technically earn enough in that employment to suffer PAYE deductions from their pay, the pre-employment checks (including starter checklists), which should have been completed by the employer were absent. There was also a lack of any form of real time information (RTI) record-keeping. As such, it would have been impossible for Hedges to prove he had made the necessary checks to determine whether the employees were earning income from other sources and potentially using up their UK personal allowances elsewhere. Cardinal rule – back to basics As payroll and employment taxation professionals know, the cardinal rule on
commencement of employment is to establish this fact pattern. The default position is then to operate BR tax codes (or if they’re a higher rate taxpayer, DO) on any new employee who cannot declare the employment they’re about to commence is their only, or main, job. This is in accordance with the starter checklist. Employers must get this first step right – to ensure the employee is paying the right amount of tax at the right time. HMRC reserves the right to charge PAYE arrears on this basis alone. The FTT found the facts showed ‘that there was a PAYE scheme set up in relation to Mr Dean Hedges’ employees at the Farmhouse pub, which operated from 6 April 2013 to 1 November 2013 and that seven months of nil returns were made. At this point, the scheme was cancelled’. Hedges argued he had been instructed by HMRC to discontinue the PAYE scheme – but his record-keeping was unable to prove this. It appears, when reading between the lines, that Hedges had simply decided to stop operating the scheme because no-one was paying any taxes. So, to him, it was simply a superfluous administrative exercise. Unfortunately, this
meant he wasn’t adhering to the PAYE Regulations and had inadvertently tripped himself up. HMRC’s stance – using the available legislation to collect tax and impose penalties
The tax HMRC issued Regulation 80
determinations under the Income Tax (PAYE) Regulations 2003. Regulation 80 applies if ‘it appears to HMRC that there may be tax payable for a tax year’ under Regulation 67G or 68, which both require employers to pay over amounts of PAYE deducted to HMRC. Where it applies, HMRC can calculate the tax it deems to be due ‘to the best of their judgment’, and serve notice of their determination on the employer, which is given legal force by Regulation 80(5). It allows HMRC to compute the liability on the employer as if it was an assessment of income tax made under Section 34 of the Taxes Management Act (TMA) 1970 – basically, as if the amount of tax determined was income tax charged on the employer.
| Professional in Payroll, Pensions and Reward | September 2022 | Issue 83 22
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