Amendments to Regulation 72E & F of Pay As You Earn (PAYE) regulations

25 February 2014

HMRC has published for external comment draft Statutory Instrument making amendments to the Income Tax (PAYE) Regulations 2003.

The measure enables HMRC to calculate the amount of tax due where workers whose employment status has been recategorised have made self assessed payments. It also provides HMRC with an option when it issues a notice to the employee of whether to include details of the amounts offset and the tax years they refer to, or merely state the employment to which the notice applies.

The Regulations have been published with accompanying Explanatory Memoranda and TIIN in respect to changes to Regulation 72E and F.

The following is extracted from the Explanatory Memoranda and explains in more detail what the amendments mean for some employers.

The Income Tax (Pay As You Earn) Regulations 2003 make provision, amongst other things, for the recovery of tax from an employee rather than an employer, where it appears an amount intended to represent tax on the PAYE income has been self-assessed or paid on account.

Under the 2003 Regulations, HMRC can, if certain requirements are met, transfer the liability for payment of tax from the employer to the employee. In order to do this HMRC must, currently, serve a notice on the employer and each individual concerned. The Notice to the individual must specify each year concerned and the tax paid for each year. Where large numbers of individuals are affected, this creates a substantial administrative burden on HMRC with no material advantage for the individuals.

This instrument reduces the burden on employers and HMRC by permitting the serving of notices on individuals but providing an option as to whether to include details of the amounts offset and the tax years they refer to or to only state the employment to which the notice applies. This instrument will also enable HMRC, in certain circumstances, to undertake a sampling exercise to extrapolate an amount by which the tax due from the employer will be reduced.

What is being done and why

Regulation 72F was introduced on 6th April 2008 following a tax case involving the re-categorisation of a worker from self-employed to employed. As a self-employed worker, the individual had declared and paid tax on his income by means of his Self Assessment (SA) tax returns. In his decision the Special Commissioner noted that it would be preferable for the tax paid by the worker, now categorised as an employee, to be set off against the PAYE obligation of the employer.

The effect of this regulation allows HMRC to transfer the PAYE tax liability from the employer to employee by the amount accounted for or paid on account by the individual. This regulation also prevents the employee from claiming a repayment of the tax paid. In other words, the Regulation ensures that HMRC does not receive tax twice from the same relevant payment of income. HMRC does this by issuing a ‘Direction notice’ to both parties.

In arriving at an accurate tax figure in the Direction notice, Regulation 72F obliges HMRC to check the SA returns of all affected individuals. Whilst this isn’t burdensome where the numbers affected are low, it can be burdensome on both employers and HMRC where the numbers are large. The amendment to Regulation 72E enables HMRC to undertake a sampling exercise to extrapolate an amount by which the tax due from the employer will be reduced.

HMRC are currently required to issue a notice advising the employer and all employees that a Direction has been made: setting out for each employee for each affected year, full details of tax paid, tax due relating to the recategorised employment, and tax credited to the employer.

Regulation 72F in its present form places substantial administrative burdens on employers and HMRC. We believe that a more targeted approach that allows HMRC to decide what information should be included in the notices whilst retaining the employees’ appeal rights is the best way forward.

The amendment still requires the serving of a notice on an individual but provides HMRC with the option of either specifying the tax due or payable by the employee for each tax year affected or limiting it to the employment covered by the notice.

Next steps

Only those employers with large numbers of employees who are re-categorised will be affected by this change; however the legislation applies to small business in the same way as any other. It is unlikely that the public sector will be affected.

Guidance will be published on HMRC’s website for employers affected by this change and

HMRC will monitor this change and consider further amendments as necessary

Questions or comments on the draft Statutory Instruments should be emailed to PAYE Policy Team by no later than 9 March 2014.