Whose PAYE liability is it?

Pay-As-You-Earn (PAYE) was introduced into the UK tax system just after World War 2, largely because of the sudden increase in the number of people needing to pay tax. A system that is steeped in complex regulations, the good news about PAYE is that for the majority, it relieves them of the need to file a tax return.

What’s more, with the onus largely on the employer to make sure that their systems deal with employees’ tax correctly, this system means that most people are taxed at a relatively constant level throughout the year, bringing their liabilities to a close at the end of the tax year.

The PAYE system, now operated through Real Time Information, makes tax simpler for the vast majority of people.

All of that said, it would be foolhardy for anyone (even a basic rate tax payer) not to keep a weather-eye on their tax affairs from time to time. Pay rises, new benefits in kind and changes in circumstance can deem current PAYE arrangements obsolete and cause employees to fall into arrears very quickly. In addition, things can go wrong with the PAYE system either when an employer fails to operate the system properly, either by running the payroll themselves or by outsourcing to a bureau, by using either the wrong code; or where the right code is used but the calculation is wrong, or the code is wrong. In the first two instances, they are effectively employer errors and the third is a coding error.

Whose PAYE liability it is surely depends on who made the error, or does it?

Where a wrong code has been issued by HMRC, the PAYE rules do not enable HMRC to chase the employer for underpayments. What HMRC will do in this situation is look to the employee to make good the underpayment by either adjusting the subsequent year’s code or by issuing an assessment. Although this situation is relatively rare, it does appear to have been happening relatively frequently of late.

Where an employer has made an error the area is more ‘grey’. Situations may arise such as any of these (taken from HMRC website):

1. Failure to operate the right tax code upon start of your employment
2. Using a tax code without HMRC authority
3. Failure to use the same tax code for a new tax year, where no new code has been issued
4. Failing to operate tax codes sent electronically by continuing with out of date tax codes
5. Incorrect use of the PAYE Taxable pay tables
6. Mistakes in setting up software for use in the new tax year
7. Failure to follow guidance issued in Employers Help books or Bulletins
8. Addition or mistyping of pay figures

Whether an employer or an employee will be liable for the unpaid tax will depend on the application of ‘reasonable care’ rules. Generally speaking, if an employer can show that they took reasonable care to operate their PAYE system correctly, then the employee is likely to be liable. On the other hand, if it is deemed that the employer did not take ‘reasonable care’ then the employer is likely to face the shortfall.

Ultimately, it is HMRC who will decide whether or not employer errors have been made in ‘good faith’ or not, which means that it is essential for both employer and employee to protect themselves by keeping a close eye on systems, codes and payments made. Although there is some protection for employees who find themselves facing arrears and employers and employees are entitled to appeal to HMRC if they consider a wrong decision to have been made, needless to say, this is a situation that should be avoided at all costs if possible.

If you’d like help to stay on the right side of PAYE rules, why not get in touch to discuss what we can do to help?