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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: failure to operate PAYE - potential benefit implication of section 223 ITEPA 2003

When the employer pays tax which they failed to deduct from a directors’ employment income COG930060), a benefit will normally arise unless the director makes good the tax to the company.

You should

  • familiarise yourself with EIM21790 - EIM21792 and
  • discuss with employers this potential benefit when making settlements involving directors.

If the employer and/or director agrees to make good the tax either by

  • a personal payment, or
  • a loan account debit

then no benefit will arise.

If the director and/or employer gives no indication of the intention or is vague in the response, you should

  • invite the employer to settle the tax on the benefit on a grossed up basis, including NIC on the tax borne see this practical example
  • (This content has been withheld because of exemptions in the Freedom of Information Act 2000) .

If the employer declines to settle, you should

  • advise the employer to return the benefit on the form P11D (for the year in which the S223 charge arises) for the director, and
  • notify the directors processing office to expect such a return.

You should claim the resultant Compliance Revenue as identified as part of the compliance check (COG915520).

See also COG930070

Practical Example {#}

A compliance check is carried out on 5-12-2008 where a risk identified is found to be correct - that a director was paid a bonus of £10,000 on 15 November 2007.  The amount was paid gross into the loan account, which is in credit.  The director’s salary in 2007-2008 was £65,000, which was put through the payroll.  Tax and National Insurance was correctly paid on the salary.

The underpayment is as follows:

Tax Year 2007-2008                                    Total Remuneration £75,000

  Tax Employee NICs Employer NICs Total
Due £22,206.00 £3,400.05 £8,992.64 £34,598.69
Paid £18,206.00 £3,300.05 £7,712.64 £29,218.69
Underpaid £  4,000.00 £   100.00 £1,280.00 £  5,380.00

Step 1

PAYE /NIC due from ER:

Tax £4,000.00
                NIC <u>£1,380.00</u>
Interest to 5-12-08 £  272.00 
            Penalty £  807.00 
              Total £6,459.00

Note: -
- A notional 15% loading has been used to calculate the penalty.  The facts of the case would have to be considered in a real situation.

Step 2

If the director does not repay the PAYE tax to the company S223 provides for a tax charge on the director

S223 charge applies as the employer is paying the employees liability (pecuniary liability), the amount involved is earnings for Class 1 NICs purposes:

(EEEs 1%+EERs 12.8%) (£4,000@13.8%) = £552.00

Step 3

If the employer wishes to pay the tax charge on the director’s behalf it will be grossed up and Class 1 NIC will due on the tax borne.

£4,000 x 40%        = £1,600
           Tax grossed up   £1,600 x 100 / (100-40)        = £2,666.66
Class 1 NICs on tax borne       £2,666.66 x 1% (EE)        = £   26.66
                             £2,666.66 x 12.8% (ER)        = £  341.33
                                              Total        = £3,034.65
                                                SAY          £3,034.00


In Steps 2 & 3, the rates used are those for 2008/09 – the year of the settlement.

So the overall settlement from a £10,000 bonus could be £10,045(£6459 +£552+ £3034)