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HMRC internal manual

Debt Management and Banking Manual

HM Revenue & Customs
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Debt and return pursuit: PAYE: Regulation 72 (5) Income Tax (Pay As You Earn) Regulations 2003: completion of cases: examples of decisions made under Regulation 72

Please note that the following examples are for illustrative purposes. All case outcomes for real cases are determined on the facts and caveats of behaviour may result in different outcomes.

Example 1

Halfway though the tax year Jane gives her employer (who employs about 20 staff) a P2 tax code with a code BR on it, but the P2 is in respect of Jane’s pension. The employer payroll officer (who has years of experience) uses the P2 to update the payroll. The result is that Jane gets a substantial refund of tax and continues to underpay for the rest of the tax year and subsequently gets a P800 with a large underpayment which she queries with HMRC.

HMRC asks the employer for payment. The employer responds and says they want a direction so that Jane has to pay the amount. Their explanation for the error is that the payroll clerk mistakenly thought the P2 was for their employment and to save time waiting for HMRC’s P6 code, they amended the payroll. Employer guidance never advocates using a P2, but in any case, the name on the P2 was that of the pension payer. The employer therefore made two mistakes here.

HMRC view

The request for a direction is refused.

  1. There are no HMRC employer instructions which say to use the employee’s P2.
  2. In any case, the P2 showed the pension payer’s name.
  3. The payroll officer knew how to operate PAYE.
  4. There were no procedures for percentage check of amended codes.

The grounds for reasonable care are not supported by the actions and lack of procedure. The payroll officer’s action was not something that a reasonable person would have done. We are simply seeking to establish whether the payroll clerk has taken the care and attention that could be expected by another payroll clerk.

In regard to good faith, the employer’s explanation demonstrated that the payroll clerk did not deliberately under-deduct tax and it was simply a slip in procedure which the payroll clerk did not think about. But Regulation 72 Condition A sets out that both reasonable care and an error in good faith have to be satisfied before a direction can be issued.

Example 2

A large employer received a coding notice for a new employee that included previous pay and tax. The employer omits to enter the previous pay and tax details onto payroll but records the code correctly. The employee gets a refund and receives tax-free pay for a number of months because it is well into the tax year and the code is cumulative. The employee said nothing and eventually started paying some tax.

At the end of the year HMRC advise the employee that he is underpaid and he complains saying that it is his employer’s fault. HMRC can’t immediately see why so little tax was paid because the tax code was the correct code to use; however, they request payment from the employer.

The employer asks for a Reg 72 Condition A direction, on the grounds that this was a one-off error and that they usually take reasonable care to operate PAYE. The employer confirmed that they undertake a 10 per cent check on all repayments to employees; unfortunately, this employee was not in that sample - evidence was provided of the check. The employer also did a sample check of coding changes; again, a sample was provided but the employee was not in the sample.

HMRC view

The request for a direction is allowed.

  1. HMRC accept that it cannot expect perfection from employers.
  2. The employer had safeguards in place for repayment checks.
  3. The employer also checked sample code changes.
  4. There were no notes that showed the employer had made this mistake before.
  • Reasonable care - People do make mistakes, we do not expect perfection. Based on the above, HMRC is satisfied that the employer took reasonable care to operate PAYE despite the error.
  • Good Faith - There is no evidence that the payroll clerk intentionally omitted the previous pay and tax to produce a lesser tax amount to pay across to HMRC; despite the safeguards an innocent error occurred that could not have been prevented.

A direction is issued to the employee. The employee is not happy and appeals but does not have any grounds to show why the employer didn’t take reasonable care despite the error. It should be noted here that the decision to issue the direction is not based on the fact that the employee benefitted or failed to ‘speak up’. The notice is issued based on the employer’s facts given and can only be overturned if the employee has corroborating evidence which disproves the explanation.

Example 3

Joe starts a part-time job at a garden centre as he is bored with retirement. He already received a state pension and an occupational works pension. The garden centre manager relies on his daughter to help with the payroll but didn’t give her any training to do the job. She puts all new starters on cumulative codes with full personal allowances because that is what she thought was the right thing to do. This results in all new starters, including Joe, being underpaid at the tax year end. HMRC sends Joe a tax calculation for underpaid tax, P800. Joe contacts HMRC to complain it’s not his fault.

HMRC confirms incorrect Full Payment Submissions were sent to HMRC for Joe and asks the employer to pay the PAYE underpayment. The garden centre manager says he can’t pay the PAYE but wants a direction anyway. He explains that he left the PAYE to his daughter so it’s not his fault; that his daughter did, however, operate a tax code in line with the personal allowances due. He also says that he thinks Joe should sort his own tax out.

HMRC view

The request for a direction is refused.

  1. The payroll was being run without reference to the HMRC employer help books.
  2. The payroll clerk predetermined which code to operate rather than follow procedure.
  3. No checks were in place to prevent repeated errors.
  4. The employer provided no proper training for payroll staff.
  • Reasonable care - there is nothing here which demonstrates that the employer was taking his responsibilities seriously. Doing the minimum and getting by seemed to be the view.
  • Error in good faith - Not satisfied here as a reasonable person would know that a lack of training or adherence to HMRC’s ‘help books’ does not make the error one that was made in good faith. The under-deduction was avoidable.