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HMRC internal manual

Compliance Operational Guidance

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HM Revenue & Customs
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Supporting Guidance: employer compliance: guidance by subject: settlement: direction under Regulation 72F: sampling and extrapolation

Background

HMRC has to check the SA position of each employee to determine the amount of tax to include in a direction notice. This process can be burdensome for both HMRC and employers where large numbers of employees are involved.

To ease the administrative burden for HMRC and employers when large numbers of employees are involved, Regulation 72E and F were amended with effect from 6 April 2014, see COG915260.

  • The amendments to Regulation 72E(a) and (b) allow HMRC to sample a selection of employees to confirm they have included relevant payments in their self-assessments and then extrapolate the amount of tax that can be offset against the employer’s liability.
  • The amendment to Regulation 72F removes the requirement to specify the amount of tax set off against the employer’s PAYE liability in the direction notice to employees. Instead, where sampling and extrapolation are used HMRC can specify the employment in respect of which the relevant payments were received.

A direction under Regulation 72F serves two purposes. It

  • removes the PAYE liability from an employer, and
  • prevents an employee claiming credit for tax the employer failed to deduct.

It is therefore essential that you identify all the employees for whom you intend to make a direction and update their records with an SA note, see COG915290, to ensure HMRC does not repay tax which the employee did not pay or have deducted.

Also, the changes to Regulation 72F have not removed the legal requirement to issue a direction notice to all the employees for whom you have an address (see Regulation 72F(3) and (5)).

In order to make a direction under Regulation 72F (whether or not sampling is appropriate/used) all of the conditions in Regulation 72E must be met. The amendments to Regulation 72E have not removed the requirement for

  • one of the conditions A, B or C to be met (COG915270) and
  • a trigger event to have occurred (COG915275).

In practice this means that you have identified a PAYE failure, calculated the gross liability for all years and the employer has confirmed their agreement of the gross liability in writing.

When sampling may be appropriate

Before you can consider a direction or whether to use sampling to determine the amount to set off against the employer’s liability you must first establish the employer’s gross PAYE liability for each year.

Sampling will only be appropriate when you are considering directions involving large numbers of employees, for example

  • where large numbers of workers have been re-categorised from self-employed to employee, or
  • an employer has failed to account for PAYE on the exercise of share options involving large numbers of employees.

It is not possible to define what constitutes a large number of employees for the purpose of Regulation 72E and F but sampling is unlikely to give a reliable result where the sample is taken from a population of less than 100 employees.

When considering whether sampling is appropriate you should take into account

  • the size of the employer
  • the number of employees for which a direction may be appropriate
  • the total amount of tax at stake
  • the time and cost to HMRC and the employer if we had to check all the employees SA records, and
  • the confidence level and margin of error you want the representative sample to achieve.

In cases involving significant numbers of employees or amounts of tax you should contact KAI who will be able to provide advice on how to select the representative sample and the size needed to produce a statistically valid outcome within agreed confidence levels and margin of error.

Sampling and extrapolation will only be appropriate if you can identify a statistically valid representative sample which you are satisfied will provide an outcome with agreed confidence levels and margins of error. In these circumstances you should

  • check the SA records of the representative sample to confirm whether they have made self-assessments which include the relevant payments from the employer, and
  • extrapolate the amount of tax which has been paid on those payments to determine the amount of tax that appears likely to you to have been self-assessed by the remaining employees.

Sampling will only work if the underlying circumstances of the sample population are the same, and the outcome for one year cannot be used to determine the amount of tax to direct for another year unless the circumstances are the same for each year.

  • Where the employees and the nature of the payments are the same each year it may be possible to extrapolate the amount directed for one year for earlier years.
  • However, where the employees or payments are different you will have to sample each year separately to determine the amount you can direct.

The decision whether or not to sample and extrapolate and how to do this (including selecting the representative sample) is a matter for HMRC, however you should try to obtain the employer’s agreement and always explain your decision.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)

Employment status

Sampling and the sample population for the purpose of considering a direction under Regulation 72F should be considered separately from sampling to determine the employment status of workers in a status review.

A sample used to determine the status of individuals or groups of workers will not necessarily provide a representative sample to determine the amount of tax that is likely to have been self-assessed by those individuals who are employees. These are separate processes which should be dealt with separately at the appropriate stage.

In a status case you can only consider a direction under Regulation 72F after you have

  • completed the status review
  • determined the employment status of the workers
  • identified the workers who should have been engaged as employees
  • calculated the gross tax (and NIC) liability for each year, and
  • obtained the employer’s agreement in writing to the gross liability (see Regulation 72E(5)(d) and COG915295).

If the employer does not agree that a PAYE failure has occurred, or is reluctant to sign a ‘trigger’ letter accepting the liability, you will have to issue a Regulation 80 determination for the gross liability, see COG915296.

How sampling may work in practice

The representative sample can only be selected from those employees for whom the employer is able to provide information which will enable you to trace an SA record, for example UTR or NINO and the result of the sample exercise can only be extrapolated to this group of employees.

If the employer does not have, or is unable to provide, information to enable you to trace an SA record for any employees the employer will be liable to the gross amount of tax (and NIC) due on payments made to those employees. This is because if you are unable to identify a person you will not be able to decide whether they have or are likely to have included the relevant payments in a self-assessment.

Example

  • Following a compliance check, 1000 workers are re-categorised from self-employed to employees.
  • The employer provides sufficient information which would enable you to identify 800 workers and check whether they had an SA record.
  • Only these 800 workers can be considered for sampling.
  • The employer will be liable to the gross amount of PAYE (and NIC) due on payments made to the 200 workers for whom they are unable to provide information which would enable you to identify the person and check whether they had made a self-assessment.
  • To obtain a statistically valid result you (or KAI) decide that you need to sample check 260 of the 800 employees included in the sample population.

You should prepare a spreadsheet to record the following information:

  • employee name
  • NINO/UTR
  • job/role (if appropriate)
  • total relevant payments
  • employer’s gross PAYE liability payable on relevant payments 
  • total amount of tax you can direct under 72F.

You should total the relevant payments, employer’s gross PAYE liability and amounts you can direct under 72F, and then calculate the total amount you can direct as a percentage of the total gross PAYE liability.  

In the above example, if the percentage you can direct in respect of the gross liability relating to the 260 employees you sampled was 75% of the gross liability, this is the percentage you should direct (set off) against the employer’s total gross liability for the 800 employees in the sample population.

A direction notice should be sent to each of the 800 employees in the sample population for whom you have an address or last known address.

  • The notice sent to the 260 employees you sampled must specify the employment in respect of which the relevant payment was received and the amount of tax that has been self assessed on the relevant payments.
  • The notice to the remaining 540 employees in the sample population should only specify the employment in respect of which the relevant payment was received and tax was likely to have been self-assessed. This is because you have not checked whether they have made a self-assessment which includes the relevant payment from this employment.

If any of the employees for whom the direction notice only specifies the employment in respect of which the relevant payment was received

  • appeals against the direction
  • attempts to include tax the employer ought to have deducted as an adjustment under Regulation 185, or  
  • makes an overpayment relief claim under Schedule 1AB TMA 1970 which includes an adjustment for a PAYE credit in relation to the relevant payment for which the direction was made

HMRC can issue a further direction notice specifying the amount actually paid by that employee.  

The direction notice you send to the employer should show the total amount directed in relation to the gross liability for the tax year.

In this example the balance payable by the employer in respect of the 800 employees included in the sample exercise should be added to the gross tax (and NIC) payable in respect of the 200 workers excluded from the sample exercise.