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HMRC internal manual

Compliance Operational Guidance

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

Computations issued to the employer

  • The computations must show the total amount of PAYE and NIC that the employer has underpaid before any set offs.
  • Amounts directed under Regulation 72F and set off for Class 2 or Class 4 NIC treated as payment on account of primary Class 1 NIC should be easily identified within the computations.
  • You must ensure the employer knows the employee has a right of appeal against a direction under Regulation 72F, see COG915315.
  • Due to confidentiality you should not disclosure to the employer any details of an individual’s Self-Assessment.


A PAYE direction or set off of Class 2 or Class 4 NIC does not reduce the figure on which penalties are calculated. The employer remains liable to penalties on the full amount of tax and NIC which should have been reported on their P35 or Full Payment Submission/Earlier Year Update return.

Note: You are penalising the inaccuracy on the return and the penalty is based on the total understated tax and NIC before any PAYE direction or set off of Class 2 or Class 4 NIC, see COG914030.


A PAYE direction or set off of Class 2 or Class 4 NIC will reduce the figure on which interest is charged. Interest is only charged on any balance of tax remaining payable by the employer after a direction or NIC set off has been made. The employer will not be liable for interest on any amounts which have been covered by a direction.

Contract settlement

A specimen of the letter of offer you should use when agreeing a contract settlement is at COG914755 - Regulation 72F cases. This can be varied depending on the employer entity, for example sole proprietor, partnership, company and whether any ‘voluntary’ liability (statement B) is included.

The gross amount of tax and NIC before any direction or set off of Class 2 or Class 4 NIC should be included in the statement of liabilities and the gross offer. The amount directed or set off should be shown under any payments on account as follows:

  • Less £xxxx for which a direction under Regulation 72F of the Income Tax (Pay As You Earn) Regulations 2003 has been made.
  • Less £xxxx Class 4 National Insurance Contributions treated as paid on account of primary Class 1 NIC under Regulation 101 of the Social Security (Contributions) Regulations 2001.
  • Less £xxxx Class 2 National Insurance Contributions treated as paid on account of primary Class 1 NIC under Regulation 51 of the Social Security (Contributions) Regulations 2001.

If you have any difficulties in constructing a letter of offer you should consult TAA Technical.


As you are including the amount directed in the letter of offer and because you will not be moving payments from one source to another, it is essential that only the net amount recoverable from the employer is recorded on SAFE.


Gross tax and NIC £30000
Penalty calculated on gross tax and NIC £2500
Interest calculated on net tax and NIC £500
Gross offer £33000
Less Class 2 and Class 4 NIC treated as paid on account of primary Class 1 NIC £1250
Less Amount directed under Regulation 72F £5000
Net amount recoverable from employer £26750
The amount to be entered on SAFE is £26750

Tax relief for Class 6 settlement

Only the net amount paid by the employer/contractor, excluding penalties and interest can be considered for relief. See COG915085 - Tax relief for amounts Included in a class 6 settlement.

In the above example this would be £25,000 (£28,000 less penalty and interest of £3,000).

You should provide a breakdown of the figures when notifying details of the settlement to the IT/CT caseworker (COG915100 Cross Tax Referral).


Currently ECLSS cannot accommodate the Regulation 72F directions (for example gross amount culpable for penalty but net amount only accountable for in the settlement) and a future enhancement is under consideration.

In the meantime the penalty calculation should be

  • manually amended (and a note made on the Contract Settlement Form (CSF) and
  • the penalty ’agreed’ figure on the system adjusted to take account of the revised penalty due (including the penalty element on the Regulation 72F culpable amount).

Class 2 NICs - potential continuing liability

In any situation where the employment status of a worker is changed from self-employed to employed for a particular period or specific contract, unless each worker is contacted to establish their full employment circumstances and future intent, it is impossible to know whether or not there was

  • a dual Class 1 and Class 2 NI liability, or
  • whether there will be a continuing liability to Class 2 Contributions.

It has therefore been decided that the onus will be placed on the worker to contact NIC&EO to advise that they have ceased in self-employment (COG915325 - Regulation 72F Impact in NIC).

The ‘Change in Employment Status - Declaration of Non-Liability for Class 2 NIC’ letter (Word 31KB) should therefore be

  • provided to the employer/contractor at the settlement stage and the employer/contractor should be asked
  • to provide a copy to each of the workers’ re-categorised.

It is then up to the worker how they wish to proceed.

Note: It is imperative that this letter is only provided at the settlement stage, that is only when

  • the liability has been agreed (contract settlement), or
  • determined by formal action where the outcome has been ruled in our favour, and
  • not when an opinion has been provided.

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