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HMRC internal manual

Employment Income Manual

Employment income: benefits in kind treated as earnings under Section 62 ITEPA 2003: the pecuniary liability principle: operation of PAYE

Section 62(3)(a) ITEPA 2003

The employer cannot operate PAYE when making a payment to a third party such as a gas company, or British Telecom. Instead, the item has to be shown on form P9D (for 2015/16 and earlier) or P11D as appropriate. But when the employer undertakes to pay remuneration free of income tax, that is without recovering it from the employee, there is further tax to be paid. Guidance is at EIM07700.

Where the employer pays an employee’s bill indirectly by giving the employee the cash with which to pay the bill, PAYE should be operated. The employer is then paying cash earnings to the employee, not discharging a debt.

The position can be illustrated by reference to Wilkins v Rogerson (39TC344) (see example EIM00550). The employer in that case gave the employee a suit. The employee was held to be chargeable on its second-hand value. But altering the facts slightly produces different results.

  • If the employee had gone along to the shop and ordered the suit and the employer had paid his employee’s bill, the employee would have been chargeable on its full cost. The employer would have discharged the employee’s debt (see EIM00580). The employer could not deduct tax from the payment under PAYE
  • If instead of paying the bill direct, the employer decided to give the employee the cash with which to pay the bill, he would have to pay his employee such a sum as after deducting PAYE from it left the amount of the bill. The cash is taxable as earnings, like a salary or wage, from which PAYE tax has to be deducted.