Set-offs - S130 FA2008: set-off in specific direct tax situations - PAYE
Employers deduct tax, National Insurance Contributions and student loans from their employees and contractors deduct (CIS) tax from their subcontractors. They should pay this to HMRC monthly, quarterly or exceptionally annually. Where they don’t do this, DMB has to establish a debt to be able to recover that through enforcement proceedings where necessary.
A debt is established in one of four ways:
- by the issue of form P101
- from a quantification of the employer/contractor wages records
- by the employer/contractor providing details of their deductions
- from employer annual returns and contractor monthly returns.
Set-off only applies where the debt has been properly established as due by one or more of these methods.
Establishing an in-year debt
P101 is the prescribed notice in legislation and provided for by Regulation 78, of the Income Tax (Pay as You Earn) Regulations 2003. It is a notice generally issued through IDMS which tells the employer how much we believe the debt to be (based on previous payments received from them). On the expiry of a statutory 7-day period after its issue, the debt becomes legally due and payable.
Debts may also be established on a Field Force or Compliance visit to examine the wages records (known as quantification). If no payment is made once we have established the debt, a letter is left and as with the P101, we can legally collect the amount after 7 days.
If the employer/contractor provides details of the amounts due, a warning letter is issued and again we can legally collect the amounts after 7 days.
Identifying an established debt on IDMS
Care needs to be taken when determining if a debt is established. An IDMS work item alone is not necessarily an established debt; in other words, work items can appear on IDMS before the debt is legally established as due.
To be certain the debt is established you must check for amounts entered in the Tax/NIC fields (View Work item - current collectible amounts) and check the Action History for the date the debt was established, see IDMSUG500510 for advice on how to view the Action History. If there are several months outstanding you must pay particular attention to the amounts included on the P101.
If it is unclear from IDMS what debts have been established, you may wish to contact the PAYE SPoC for help confirming the debt position.
If there is still any doubt about whether the in-year PAYE debt is established, you should not proceed with set-off.
If the taxpayer is in a regular repayment situation you should add a note on the PAYE case to this effect. If there is a large debt or it is escalating quickly and has not yet been established then you should contact the PAYE SPOC to advise of future repayments and that set-off wasn’t done on this occasion due to the debt not being established.
Where set-off does not clear an in-year amount in full
Special care should be taken if the VAT credit amount available for set-off does not cover the full amount of the in-year PAYE debt. This is because any payment towards a month will close the IDMS work item. For example, if PAYE for the month is £1,000 and only £100 VAT credit was available for set off, the Local Action Notice (LAN) would clear and PAYE would not chase the remaining £900 balance.
Action to reinstate the LAN is required in these circumstances. You will need to contact the PAYE SPoC and ask them to reinstate when the set-off does not cover a complete in-year month PAYE debt.
Before making any set-off where the 7-day notice period has only just expired, consideration should be given that payment may have been made but has not shown up on the taxpayer’s record yet. A payment made on the 7th day will not appear until the 9th day at the earliest and the 13th day at the latest when the interaction of weekends and bank holidays has delayed an update to the record.
If 7 days have expired then the debt is established and the VAT repayment should therefore be held for set-off. Allow sufficient time to expire for any payment on the 7th day to hit the record before making the set-off. This will help ensure that less time is wasted on an abortive set-off, reversal and manual repayment.
As with any other set-off, the allocation of the credit in the set-off should be done to least disadvantage the taxpayer. The PAYE debt may include an underpayment for a previous year in which case that should be given priority in the set-off where it is the earliest debt.
Due to the monthly frequency of in-year PAYE and the resource-intensive nature of set-off, you may also want to consider the compliance history of the employer in making previous in-year payments, such as if payment was received in response to the last P101 issued, or whether the debt had to be referred for enforcement.
Notification of the set-off
When advising the employer about the set off you should supply full details in the set-off letter; for example, how much was set off against what month and if only part covered please advise the amount still due for that month.