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HMRC internal manual

Compliance Operational Guidance

Supporting Guidance: employer compliance: guidance by subject: settlement: direction under regulation 72F: background

The Special Commissioner’s decision in the case of Demibourne Ltd v HMRC highlighted a number of tax issues for employers and their employees which can arise as a consequence of an employer’s failure to operate Pay As You Earn (PAYE).

These issues relate to a situation where Income Tax has been paid to HMRC on PAYE income, but by the wrong legal person (such as the employee rather than the employer).

The Demibourne case confirmed that:

  • Where an employment relationship exists, the employer is responsible for deducting tax from payments made to the employee in accordance with the PAYE Regulations
  • Prior to the amendment to the PAYE Regulations, HMRC did not have the discretion to choose whether to collect tax from the employer or the employee unless there had been a Direction to transfer PAYE to the employee under either Regulation 72 or Regulation 81 of the PAYE regulations
  • An employee is entitled under Regulation 185 of the PAYE Regulations, to treat as deducted any tax that the employer was liable to deduct whether or not that tax was actually deducted. However the Regulation 185(5) credit is restricted so that an employee is not repaid any amount they didn’t actually pay or have deducted.
  • Unless there had been a direction to remove the PAYE obligation from the employer under either Regulation 72 or Regulation 81 of the PAYE Regulations, the employee was entitled to recover tax paid through SA, subject to time limits and HMRC could not refuse to repay on the grounds they had not recovered the tax from the employer.

Regulations 72E to G were introduced following Demibourne to extend the circumstances where HMRC could make a direction to remove a PAYE liability from an employer and prevent an employee claiming credit for tax the employer failed to deduct.

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