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HMRC internal manual

Employment Income Manual

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HM Revenue & Customs
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Particular benefits: PAYE tax not deducted from director's earnings: to which directors do the special rules apply and when do they apply?

Section 223(7) ITEPA 2003

Where there has been a failure to deduct tax from remuneration of certain directors the special charge in Section 223 ITEPA 2003 applies. It does not apply to employees who are not directors. It does apply to a person employed as a director of a company unless:

  • he or she has no material interest in it (see EIM20200 and EIM20212) and either

    • he or she is a full-time working director (see EIM20202), or
    • the company is a charity or non-profit-making concern (see EIM20210 to EIM20211).

See EIM11800 onwards where the failure to deduct tax is in respect of a readily convertible asset.

When does the charge arise?

Where there has been a failure to deduct tax from remuneration of certain directors (see EIM21791) the special charge in Section 223 arises where:

  • a person on making a payment of earnings to a director within EIM21791 fails to deduct the full amount of PAYE tax he or she should deduct when making the payment and
  • the tax which has not been deducted is paid to the Inland Revenue by someone other than the director and
  • the director does not make good all the tax paid to the Inland Revenue by that person (see EIM21120 to EIM21122).

The person failing to deduct tax and who subsequently pays it to the Inland Revenue will nearly always be the employer.

See EIM11800 onwards where the failure to deduct tax is in respect of a readily convertible asset.