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HMRC internal manual

Enquiry Manual

Close Companies: Settlement: Employment Income Route: Introduction

Employers are responsible for the correct operation of PAYE and are normally held responsible for any failures. However, if the employer cannot pay what is due (for example because of insolvency) and an under-deduction relates to a particular employee or director, then HMRC may relieve the employer of the liability and transfer it to the employee or director.

The liability is transferred from the employer to the employee, or director, by making a direction under Regulation 72(5) Condition B (or if Regulation 80 determinations have been made, under Regulation 81).

Approval for pursuing the employment income route is required from contact link except where

  • you have in place ‘alternative’ CTA10/S455 and employment income assessments made in accordance with the final paragraph of EM8605 that the tribunal can determine, or
  • there is clear evidence that extractions were in the nature of remuneration.

Often approval can be given over the telephone with sight of the papers only requested where necessary.

However, before any necessary approval is sought, and depending on the expected yield, you should make advance contact with a PAYE Directions Team

  • to ascertain if sufficient facts have been established to enable a direction and decision to be made, and
  • obtain, if necessary, further procedural advice.

Often a formal direction will be required against the directors or employees of an insolvent company or one that simply ceases EM8730. As recovery will be from the director(s), or employee(s), the extent to which funds are available to them needs to be considered.

At the same time you should also consider NICs liability

  • after 05/04/99 for personal liability notices on culpable officers (NIM12201) and
  • after 05/04/2004 under Reg 86 of the Social Security (Contributions) Regulations 2001, if there are unpaid primary Class 1 NICs due to negligence on the part of the employee (NIM12125).

All Directions and associated NIC Decisions are considered by Individuals & Small Business Compliance (ISBC)

You should not normally try to recover outstanding tax, National Insurance Contributions and interest, on the basis that these liabilities arise from employment, where the yield from your enquiry (not from any individual director or employee), is likely to be less than £25,000. However there will be occasions where the expected yield is less than £25,000 but you still wish to recover the outstanding tax (COG931350). Those circumstances can include, but are not limited to

  • use of an avoidance scheme,
  • closure of a company during an enquiry,
  • SA Repayment cases from tax credits claimed to have been deducted at source by the now insolvent company, or
  • failure to reach a negotiated settlement with the company.

Before making any assessments you should contact Individuals and Small Business Compliance (ISBC) to check if the evidence held by HMRC supports use of the employment Income Route.