Paringdon Sports Club (The Company) failed to deduct £1,259.80 of PAYE from an employee’s salary in the 2011/12 tax year. As a general rule, where the correct amount of PAYE is not withheld HMRC are entitled to recover such under-deducted tax from the employer. They can direct, however, that the employer is not so liable if the employer satisfies them: (a) that it took reasonable care to comply with the Regulations; and (b) the failure to deduct the full amount was due to an error made in good faith. In this case the Company objected to making the payment of the outstanding PAYE and asked for HMRC to collect the tax from the employee. HMRC declined to pursue the employee on the basis that the employer did not take reasonable care. The Company appealed this decision to the First-tier Tribunal (FTT).
The crux of the matter was the tax code that the Company applied to the employee’s salary. Where an employee joins and does not supply a P45 to the employer, the employer should operate a 0T tax code until such time as the employee provides a P45/P46 or HMRC provide a code. The Company however decided to apply a standard tax code and to write to the employee asking him to contact HMRC and obtain the correct tax code.
Before the FTT the Company argued that this amounted to reasonable care and that the error was made in good faith; consequently, the company argued, HMRC should pursue the employee for recovery of the tax.
The judge did not agree, however, and held that: “It is an essential part of the PAYE system that the obligation is on the employer correctly to deduct and account for income tax on an employee's earnings. Our view is that the hypothetical reasonable and prudent taxpayer can be attributed with an awareness of this obligation and with the need to be mindful to take reasonable steps to fulfil that obligation.”
“In the context of taking on a new employee, a reasonable and prudent employer would, therefore, take all reasonable steps to ensure it is aware of the correct procedures to follow and code to use according to the Regulations.”
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