These paragraphs are not intended to be a detailed review of the PAYE regulations. The object is simply to provide an outline of the more important regulations which the adviser needs to know when advising in an employer compliance review.
The main thrust of the regulations is to require anyone who makes a payment which is chargeable to income tax under ITEPA 2003 to deduct tax in accordance with those regulations, and to retain and produce records for inspection. This applies to all employers, including overseas employers who have a tax presence in the UK, even if they are not resident here. For example, a non-resident employer operating in the UK through a branch or agency would be obliged to operate PAYE in respect of earnings paid to his employees in the UK. The effect of the regulations is to make it unnecessary in the great majority of cases for HMRC to make assessments to collect tax from people in employment. The tax is legally due without the need for an assessment and the responsibility for accounting for it to the collector is placed on the employer.
In Booth v Mirror Group Newspapers plc  BTC 455 the High Court held that a company which made a payment to a person to induce him to enter into a contract of employment with a third party, which it was accepted was an emolument of the resulting employment, was obliged to deduct tax from the payment. Hobhouse J said that there was no indication in the statute or the PAYE regulations that any class of taxable emoluments should escape the PAYE scheme. The payments were within the terms of (what is now) reg. 46 of the 2003 regulations (SI 2003/2682), the definition of ‘employer’ being the person who paid an emolument.
The statutory authority for HMRC to make the regulations is ITEPA 2003, s. 684. This enables HMRC to make regulations by way of statutory instruments to deal with the administration of PAYE and in particular:
The regulations made under the authority of ITEPA 2003, s. 684 have been consolidated as the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682). The Social Security Contributions and Benefits Act 1992, Sch. 1, para. 6 enables regulations to be made under which the PAYE system may be used to collect Class 1 NIC.
Employers should take action as set out in the Employer’s Help Cards (CWG1) (issued annually as part of the employer’s pack), following the P45/P46 procedures, as appropriate, for employees commencing and leaving during the year.
In any employer compliance review, it may be expected that the employer’s compliance with the P46 procedures will be examined closely, and it should be noted in this respect that the onus of ensuring that the employee’s name and address is not fictitious is placed on the employer. It should also be noted that obtaining a form P46 retrospectively will not absolve the employer from his responsibility to account for the tax which ought to have been deducted in the absence of a correctly completed form P46.
In such circumstances, the employer will be called on to pay basic rate tax on the gross amount of the earnings paid to the employee concerned. If the payments to the employee were also above the Class 1 NIC threshold, the employer will also have to account for the NIC which ought to have been paid. If the employer had agreed to make net (or ‘free of tax’) payments to the employee, the tax and NICs will be calculated on the amount paid, grossed up to take account of the employer having paid the tax on the employee’s behalf.
The employer should remit to the collector any tax/NIC due within 14 days of the end of each income tax month.
As a result of the Carter Review, regulations have now been introduced to require that, as in the case of end of year returns, all PAYE filing during the course of the tax year is made online by medium-sized and large companies from 6 April 2009. Further regulations covering small employers will be introduced later. The regulations are contained in Income Tax (Pay As You Earn) (Amendment No. 4) Regulations 2007 (SI 2007/2969), which amend Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682). They extend the requirement that electronic communications must be used for the delivery of information. Employers who are already required to file form P35 or P14 electronically are now also required, by these Regulations, to use electronic communications to file form P45 Part 1, form P45 Part 3, form P46 and form P46(Pen). These Regulations also provide for penalties if electronic communications are not used for the delivery of these forms.
These Regulations also make amendments relating to the contents of form P45 Part 1 and Part 3 and to form P46 procedures for new employees: matters that are dealt with in Chapter 2 of Part 3 of the PAYE Regulations (new employees (other than pensioners): forms P45 and P46); and to the forms and procedures for new pensioners: matters that are dealt with in Chapter 3 of Part 3 of the PAYE Regulations (new pensioners: forms P45 and P46).
These Regulations also make minor amendments to reg. 186 of the PAYE Regulations (recovery: adjustment of employee’s code) and to reg. 213 of those Regulations (how information may be delivered).
Various returns have to be completed by the employer at the end of the tax year and sent to the PAYE tax office. He must also complete and sign a declaration and certify that all the particulars required to be entered on the end of year returns are in every respect fully and truly stated to the best of his knowledge and belief.
All employers, whatever their size, are required to file PAYE end of year returns online. There are penalties for failing to do so.
Every employer is required by the Income Tax (Pay As You Earn) Regulations 2003, reg. 68 to account for the correct amount of tax and NIC which should have been deducted from the earnings paid to his employees. Normally, if the employer fails to deduct the correct amount, he will nevertheless remain accountable to the collector of taxes for any amounts under-deducted. However, there are two instances in which the collector may direct that the under-deduction should be recovered from the employee:-
PAYE is to be applied to the earnings of an office or employment which are paid by the employer to the employee. For these purposes, ‘earnings’ are defined by ITEPA 2003, s. 62. PAYE is applied to the assessable earnings after deducting allowable superannuation contributions. The ‘employer’ and ‘employee’ are defined as the parties to a contract of service or as the person under whom an office-holder holds office and the office holder (ITEPA 2003, s. 4 and 5).
Guidance on what is to be included as ‘pay’ for the purposes of the operation of PAYE is given in HMRC’s Employer’s Further Guide to PAYE and NICs (CWG2). The Guide lists various items which are not to be included in ‘pay’ for tax deduction purposes.
Where employees are engaged under a gang, squad or ‘butty’ system, tax is deductible under PAYE in respect of their earnings. In most cases, the responsibility for deducting tax and maintaining the deductions working sheets will remain with the principal employer, i.e. the employer of the gang leader, not the gang leader himself. However, if the gang leader is not, himself, an employee, but an independent employer of the members of his gang, it will be his responsibility as an employer to operate PAYE in respect of the wages he pays and to keep the deductions working sheets. In that case the principal employer would have no responsibility for under-deductions of tax and NIC.
Where a trader claims a deduction in his accounts for payments to gangmasters, the inspector will ask for the names and addresses of the recipients. Where such details are not provided or are found to be false, HMRC will generally seek to recover from the trader the tax and NIC which it appears to them has been lost. Clients who make such payments should, therefore, be advised to obtain the names and addresses of any gangmasters who supply casual labour for their business and to take steps to verify these details.
Furthermore, they should be encouraged to seek advice on the status of the gangmaster to determine whether or not he can be treated as self-employed and an independent employer, responsible himself for operating PAYE on the wages paid to the members of his gang. If required, guidance may be sought from the inspector in this matter and clients should be made aware that if this question is not properly resolved and it turns out that the gangmaster was himself an employee (i.e. not self-employed), the principal employer will be held responsible for any under-deduction of tax and NIC in respect of all the members of the gang.
To improve the tax compliance by agricultural gangmasters, HMRC have set up a special unit (the Agricultural Compliance Unit) to ensure that gangmasters who are self-employed deduct and account for PAYE tax and NIC from the earnings of their workers, and make proper returns of their own business profits.