The area of employer PAYE obligations is currently subject to some change and review, with new regulations on PAYE recovery, and the new penalty regime for incorrect returns coming into force, new rules on reporting being lined up to take effect over the next two years, and consultation taking place on payrolling benefits in kind and expense payments.
The Income Tax (Pay As You Earn) (Amendment) Regulations 2008 were made on 20 March 2008 and extend the powers of HMRC to transfer PAYE liability from an employer to an employee in certain specific circumstances. These regulations came into force on 6 April 2008.
The regulations concern cases where an employer is liable for the full amount of under-declared PAYE on employment income even if the employee has actually declared and paid income tax on that same income. This issue has been worrying employers since the case of Demibourne Ltd v Revenue and Customs Commissioners (SpC 486)  STC 667 where the Special Commissioners found that, under the PAYE Regulations in force at that time, the employer was responsible for operating PAYE even where the employee had already paid the tax. HMRC did not have any discretion to choose whether to collect the tax from the employer or the employee.
The Court of Appeal in McCarthy v McCarthy & Stone plc  EWCA Civ 664 recognised that employers have a right of restitution from the employee in respect of income tax deducted. However, this did not provide much comfort for employers as enforcing the right of restitution could be difficult, particularly in the case of ex-employees.
The new regulations will benefit employers, as generally speaking they allow employers to set off tax paid by employees against their PAYE obligation. A right of set-off already exists in relation to wrongly paid NICs. In particular:
- the employer’s cashflow is improved; and
- the difficulty of seeking restitution from the employee after paying over the full amount under PAYE is resolved.
Simplified penalty regime for incorrect returns
The new single penalty regime for incorrect returns was part of the 2007 Budget. Thanks to a new Order made on 3 March 2008, however, we now know when the various elements of this new regime, which relates to incorrect returns for income tax, corporation tax, PAYE, NIC and VAT, become effective. In most cases, the effective date is 1 April 2008. Under the new regime, penalties are determined by the amount of tax understated and the behaviour giving rise to the understatement and the extent of disclosure by the taxpayer. Each penalty may be substantially reduced where the taxpayer makes a disclosure (more so if the disclosure is not prompted by a challenge from HMRC). There is a right of appeal against all penalty decisions.
At around the same time as the last pieces of the new simplified penalty regime take full effect, new rules to ensure businesses and individuals have paid the correct amounts of tax through PAYE will also apply. These new rules are intended to align and modernise record-keeping requirements for taxpayers, with accompanying new HMRC powers of inspection and requiring information, and aligning and modernising the time limits for making tax assessments and claims.
After a transitional period, the new information powers and penalties for failure to comply will take effect after 31 March 2009, and a year later, the time limits for making assessments and claims will become fully operational (after 31 March 2010).
This gives employers (and any third party providers, such as payroll operators and share plan administrators) a reasonable amount of time to revise and update their systems before the new rules take effect.
Payrolling benefits in kind and expense payments
The response deadline for HMRC’s consultation on, "Including Benefits in Kind and Expense Payments in the Payroll - A Fresh Approach" was 14 March 2008 so we now have to wait for further news from HMRC to see how respondent’s comments will be taken into account.
HMRC’s main proposal is "to make it a requirement for all benefits and expenses to be included in the payroll for tax purposes. Collecting the tax due on all benefits and expenses through Pay As You Earn (PAYE) provides scope to simplify the current reporting requirements for benefits and expenses. The overall amount of information that an employer needs to provide to HMRC about benefits and expenses could be reduced significantly and the entire P11D process, which is currently separate from the PAYE process could be abolished." According to HMRC, "this should provide administrative savings for employers of between £15 and £22 million a year.".
HMRC also proposed to abolish the £8,500 threshold for certain taxable benefits and expenses.
The treatment of benefits which are subject to Class 1 NIC and already payrolled is not intended to be affected by the proposals. However, most types of benefit are subject to Class 1A NIC and will therefore be subject to PAYE deductions of income tax under the new proposals for the first time (although Class 1A NIC will remain payable at the year-end).
The main concerns for employers appear to be whether any simplification under the proposals will in practice be outweighed by new administrative burdens, for example:
- a best estimate of income tax due will have to be made every month in respect of the affected benefits and expenses, instead of just once a year;
- when taking on new employees, employers will need more information from the old employer to operate PAYE correctly, as they will need to know the difference between the actual pay (plus benefits liable to Class 1 NIC) and any benefits that are liable to Class 1A NIC;
- it is not clear how the proposals would apply to benefits which are calculated annually, such as the charge on cheap employer loans.
Small businesses have cause to be particularly concerned, as payroll administration already takes up a disproportionate amount of time away from the day-to-day running of the business and requiring third party services and /or advice for each payroll period instead of at the year-end could also increase their costs.
Employees should also be concerned, as PAYE deducted from their total cash to pay the tax due on non-cash payments could leave them with little or no take-home pay in that pay period unless the employer is kind enough to spread the reimbursement over several months. However, any such help from the employer could itself lead to problems such as giving rise to a taxable benefit if the employee does not make good the tax paid by the employer within 90 days.Employee Incentives and Benefits Group