Supporting Guidance: employer compliance: guidance by subject: commencing the compliance check: arrears of pay for closed years
Where you discover that an employer has made payments to employees without operating PAYE or deducting NIC (up to and including 2012-13) you should
- establish the date on which the employee became entitled to payment of the earnings
- establish the date on which the earnings were paid
- calculate the tax due with reference to the rates and allowances applicable to the tax year in which entitlement to payment occurred
- calculate the NICs due with reference to the pay period in which the earnings were paid.
Where the arrears have been paid in a tax year later than the one in which entitlement arose you should calculate the reckonable date for interest on tax as follows:
- 30 days following the date on which the payment was made.
From 6 April 2013, where an employer has submitted a Full Payment Submission (FPS) and you discover, after 19 April following the end of the tax year, that the employer has made payments to employees without operating PAYE or deducting NIC you should
- instruct the employer to submit the correct information about the payments and deductions on an Earlier Year Update (EYU).
When considering behavioural penalties you should bear in mind that
- in many such cases (particularly those where a court orders the employer to pay arrears of pay) it may not have been possible for the employer to include the payments in the return for the year or years in which entitlement arose. COG914085.
Please see COG903530 that describes the ways in which an employer can account for PAYE and NIC on arrears of pay.