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HMRC internal manual

Compliance Operational Guidance

HM Revenue & Customs
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Supporting Guidance: employer compliance: guidance by subject: directors: operation of PAYE and self assessment (SA)

SA does not change HMRC’s approach to the operation of PAYE.

The employer is responsible for any incorrect operation of PAYE and is required to make good any tax under-deducted.

To check that PAYE has been correctly operated on a director’s employment income you should

  • compare the employer’s return with the director’s SA return, and
  • review the employer’s records to make sure all payments have had PAYE deducted.

A Section 9A enquiry is not necessary to do the comparison but may be needed if further information is required about the director’s personal return.

If PAYE has not been operated correctly you should

  • consider whether a direction under Regulation 72 (COG915175 onwards) should be made to transfer responsibility for the tax to the director and, if a direction is not appropriate
  • agree a Class 6 settlement with the employer, including penalties where appropriate
  • see COG915280, and
  • liaise with the SA caseworker who will make sure that the director’s return is correct.

Unless there is a direction to transfer responsibility for the tax to the director, the director is always entitled (in a case of PAYE failure) to a PAYE credit in the self assessment in accordance with PAYE Regulations 185, 186 and 188 (with the exception of a regulation 72F direction - COG915280). However unless the director makes good the tax to the employer there will also be a benefits charge under S223 ITEPA 2003 (COG930080).

Any adjustments required to the self assessment depend upon

  • what the director has previously declared as income, and
  • whether a PAYE credit was claimed.

Once the employer position is finalised the SA caseworker should be in a position to determine

  • whether there has been a direction and, if not,
  • whether the director has made good the tax to the employer, and
  • whether any adjustment is required.

The SA caseworker will also be able to decide how, depending on the facts in each case, any adjustments required should be made, either by

  • taxpayer amendment, or
  • an enquiry, or
  • a discovery assessment.