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HMRC internal manual

Employment Income Manual

PAYE: special type of payer or payee: payments by payroll agent

The Queen (on the application of Oriel Support Ltd) v HMRC

The Court of Appeal confirmed that where a person (A) who is either

  • the employer of another person (B), or
  • treated as the employer of B by virtue of section 688 (see EIM11815)

enters into an agreement with a third party (C) for C to make payment of PAYE income to B, under arrangements whereby A effectively provides C with the necessary funds, the requirement to operate PAYE remains with A.

C may operate as a payroll agent, calculating the amount of tax to be deducted and paying over that amount to HMRC in accordance with the PAYE regulations. If so, the details should be disclosed to HMRC using the employer PAYE reference issued by HMRC to A. C may not disclose payments made on behalf of clients under its own employer PAYE reference.

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Section 687 ITEPA 2003

The Court of Appeal held that a payment of PAYE income of an employee (B) made by a payroll agent (C) is within the meaning of a payment made by an intermediary of the employer (A) for the purposes of section 687 by virtue of section 687(4)(a). Consequently, subsection (1) of section 687 will not apply if the payroll agent, as intermediary, deducts income tax from the payment and account for it in accordance with the PAYE regulations.

However, the Court of Appeal decided that this only results in the employer (A) being absolved of the requirement to deduct and account for tax by virtue of the operation of section 710 (see EIM11950). Payment by the payroll agent (C) discharges the liability of the employer (A). Section 687 does not expand the definition of employer on whom the liability to deduct tax is placed; it merely enables machinery for an intermediary such as a payroll agent to discharge the liability of the employer.

In order for it to be clear that the intermediary is discharging the liability of the employer (A), the intermediary must disclose the details to HMRC under the employer PAYE reference issued by HMRC to A.