Changes to the PAYE Regulations offer relief for deemed employers where no tax loss existed
HM Revenue & Customs (HMRC) has recently announced changes to the Income Tax (PAYE) Regulations 2003 which will provide relief from the effects of one of the most controversial, and wide-ranging, judgements in the area of employment status in recent years, namely Demibourne Ltd v HMRC (Spc00486). Following representations from industry and the accountancy profession, HMRC agreed to set up a working party to assess and discuss the implications of the case and, some 3 years later, the legislation has been changed and common sense once again prevails.
For those unfamiliar with Demibourne, the case concerned the implications for a business of an unfavourable employment status decision and HMRC’s rights of recovery of tax from employers and those deemed to be their employees. In years gone by a ruling from a Status Inspector would usually result in a compromise between the parties whereby PAYE would be operated in the future, but provided the worker (now deemed to be the employee) had made Returns of their income as a self employed person, no recovery of tax would be sought from the “employer”. An eminently sensible approach, you would think, and so did HMRC until some “employees” began to realise that once the opinion had been given that they were not self-employed, they could reclaim monies paid by themselves on that basis under the “error or mistake” provisions of s33 TMA 1970. So after a number of instances where enquiries into the employer had concluded with no recovery from the business, and the employee had subsequently reclaimed the tax leaving HMRC empty-handed, the case went before the Special Commissioners in April 2005.
The facts of Demibourne are unimportant, so far as the status issue was concerned. That broke no new ground. But, what was important was the finding that HMRC had no discretion to relieve the employer of the obligation to pay PAYE, even if the worker had filed a Return and paid the tax. Two mistakes did not make a right, and the employee was able to reclaim their tax whilst leaving the employer holding the (very large) baby, metaphorically speaking.
For the employer, this was a patently unfair situation. No actual tax loss had occurred, except perhaps the additional expenses claimed by the worker as a self-employed person which failed the much stricter allowability test of s336 ITEPA 2003. The worker – who in many cases would have specifically requested self-employed status – could reclaim his tax and was under no obligation to reimburse his employer or sign the mandate authorising his repayment be made to his employer. So far as HMRC was concerned it was also an unsatisfactory situation in that many businesses under enquiry, who might previously have accepted PAYE on a going-forward only basis, dug in their heels when faced with PAYE charged in full with no relief available.
The new legislation is contained within the new Regulations 72E and 72F of the Income Tax (Employments) Regulation 2003. Regulation 72E sets out the criteria by which HMRC will judge whether or not to make a Direction, and Regulation 72F is the actual relief provision. The conditions are:
- the employee has included the income within their self assessment return;
- the employee has made a payment on account of tax due on the income;
- the employee has suffered a deduction of tax under the Construction Industry Scheme on the income;
- HMRC has an enforceable debt against the employer (be that a Regulation 80 Determination or a signed Letter of Offer).
The employee has the right, under Regulation 72G, to appeal against HMRC’s decision to allow the employer relief.
The new provisions will be a welcome relief for all businesses involved in employment status disputes, meaning that the amount of any potential liability will now be based on actual tax loss, rather than the maximum possible amount due under PAYE. Given HMRC’s increased focus on status work, particularly in relation to the Construction Industry Scheme, this can only be good news.
For further information on how the changes will affect you, please contact Peter Davies using the online form below.