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HMRC internal manual

Enquiry Manual

Close Companies: Settlement: Employment Income Route: Assessment procedure

If a satisfactory offer is not made from the director(s) or the employee(s), so that formal action becomes necessary and, where appropriate, the decision to go down the employment income route has been approved, discovery assessments and/or amendments to self assessments for all relevant years must be made.

The assessments must include a notional tax credit for the PAYE tax that should have been deducted (see COG931290).

The person may notify any appeals against the assessment(s) that cannot be resolved through discussion, or the review process, to the tribunal for them to adjudicate. However a direction can be sought without the appeal being settled.

If HMRC’s contentions are successful, or partially successful, then a direction under Regulation 72 of the Income Tax (Pay as you Earn) Regulations 2003 (or, if Regulation 80 determinations have been made, under Regulation 81) is required to transfer the liability from the company to the individual director before the tax can be recovered, EM8710. This procedure will also enable the person to have appeals against both the assessment and the direction to be heard by the tribunal at the same time.

A direction transferring liability to a director or employee can only be made by an officer who is authorised. Where the yield from your enquiry (not from any individual director or employee) is likely to be over £25,000, Individuals and Small Business Compliance (ISBC) have responsibility for considering directions and associated NIC decisions.

If the yield is expected to be below £25,000 and you consider a direction should be pursued, see EM8701.

Once a direction under Regulation 72 has been made, any unpaid or notional tax credit previously awarded in line with (COG931290) is removed from the assessment and the liability, plus the interest, can be included on the SA statement. A Regulation 72(5) direction does not provide for a penalty.

However, a penalty determination can be made under TMA70/S95 if the untaxed remuneration was excluded from the SA return, EM5250+. If the inaccuracy is in a return, or other document, for a period beginning on or after 1 April 2008, with a filing date on or after 1 April 2009, see CH83000+ because a penalty assessment under FA07/SCH24 can be considered.

Where the expenses in the accounts include the payment of directors’ private expenses, which have been ‘hidden’, deliberately or otherwise, under some broader description and they have not been declared as benefits on P11Ds, or in the directors’ returns, they would generally be disallowed in the Corporation Tax calculation and debited instead in the director’s loan account.

However, there may be cases where it is acceptable to allow these as Corporation Tax deductions and deal with them instead as benefits assessable as employment income on the director as part of his or her remuneration package. Class 1A NIC (together with related interest and penalties) will be due from the company, EM8505.