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HMRC internal manual

Self Assessment Manual

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HM Revenue & Customs
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Transfer of liability: regulations 72/81 and SA: introduction

Employer end of year returns

An employer is obliged to submit the PAYE End of Year return, forms P35 and P14 (or equivalent), by 19 May following the end of the year of deduction. A penalty is incurred where the employer fails to comply with this obligation.

Regulation 72 Income Tax (Pay as You Earn) Regulations 2003

The papers relating to the explanation are referred to the Leeds PAYE Directions Unit to consider

  • Issuing a Direction Notice under Regulation 72(5) condition A - where based on the information obtained it is determined that the employer has made an honest mistake despite taking reasonable care, and responsibility to make good the under-deduction falls to the employee
  • Issuing a Refusal Notice under Regulation 72(5) condition A - where based on the information obtained it is determined that the employer did not act in good faith or take reasonable care and the employer must make good the under deduction

If the employer fails to supply an explanation the case is referred to the Recovery Office to pursue the outstanding PAYE liability from the employer.

It is possible, whilst obtaining an explanation from the employer, that it is discovered that the employer may have wilfully failed to operate PAYE correctly and that the employee was aware of the situation. This will typically be in cases where the employee was a director of the company or was involved in the operation of PAYE for example as a pay clerk. In these cases the papers will need to be referred to the nearest PAYE Directions Unit (part of the Receivables Management Stream), to consider whether a direction under Regulation 72(5) condition B is appropriate.

Regulation 81 (4) condition A or B

Where a Regulation 80(2) determination remains unpaid, the Recovery Officer may ask a PAYE Directions Unit to consider a direction under Regulation 81(4) condition A or B, that liability falls to the individual Directors or other employees named in the determination.

Condition A covers the situation where the employer wilfully failed to operate PAYE and the employee was aware of this.

Condition B is in respect of unpaid tax on notional payments not made good by the employee.

PAYE Credit in the SA return

The notes to the SA return advise the taxpayer to enter the figure of tax shown on certificate P60. Where this is done and a Regulation 72(5) or 81(4) direction is made, the tax credit given in the calculation of liability under SA will not normally require amendment, on the assumption that the taxpayer has

  • Suffered the tax claimed
  • Not claimed credit for any tax which is under-deducted

In other circumstances the credit given in the calculation may require amendment.