First-tier Tribunal (Tax)

[2010] UKFTT 173 (TC)

TC00478

Appeal number: TC/2009/12786

PAYE Regulations –incorrect deductions in 2 tax years –refusal notice –appeal of employer dismissed

FIRST-TIER TRIBUNAL

TAX

                         EQUINOX GIFTED THOUGHTS LIMITED        Appellant

                                                                      - and -

                                 THE COMMISSIONERS FOR HER MAJESTY’S

                                                   REVENUE AND CUSTOMS               Respondents

TRIBUNAL:              Elsie Gilliland (Judge)

Alban Holden (Member)                  

Sitting in public at Auchinleck House (4^th Floor), Broad Street, Birmingham, B15 1DL on 30 March 2010

Bilvir Chander-Kumar for the Appellant

Pat Checkley for HM Revenue and Customs

© CROWN COPYRIGHT 2010

DECISION

The appeal

1.       The appeal is against the Refusal Notice issued by HMRC on 14 August 2008. The appeal is brought under Regulation 72A (4) of Income Tax (Pay As You Earn)(Amendment) Regulations 2004. (The PAYE Regulations). The Refusal Notice was made under Regulation 72A (3) of the said Regulations.

The facts

2.       It is not in dispute that there were underdeductions of tax under the PAYE scheme in respect of an employee of the Appellant for the tax years 2005-6 and 2006-7 in the sums respectively of £452.36 and £359.14. The Appellant submitted that it should be relieved of liability as meeting the requirements of Regulation 72(3) Condition A. In addition it submitted that the employee had had the benefit of the underdeducted tax.

3.       The Appellant had taken over a business and the staff of whom the employee was one in August 2004. Mrs. Chander- Kumar dealt with the payroll and tax. Both she and the accountant who acted for the Appellant gave evidence. Mrs. Chander-Kumar explained that for the balance of the tax year 2004-5 and the early weeks of 2005-6 she had calculated the tax manually using the tables supplied by HMRC.  She started to use the CDROMs for the calculation of tax in the tax year 2005-6. She had found difficulty in using the tax code supplied by HMRC for this employee. This code had a prefix K and it was only by using it without the prefix that it was accepted by the software and this was the procedure she had used. 

The evidence                                                                

4.       The accountant Kathleen Harrison produced at the hearing the P11 spreadsheet for 2005-6. This showed that the change-over from manual calculation had been at week 20 and this had followed a 5 week absence of the employee in question from the business through illness. At some stage her hours were reduced from 15 to 12 hours. Miss Harrison did not herself deal with the payroll on a day to day basis but attended at the premises after the close of each tax year to complete the necessary paperwork before the due date of 19 May. The P60s which she completed reflected the payslips. The P11 and the P60s tallied but she acknowledged they had been identified as wrong. In response to questioning she confirmed that she had not revised the P60 and sought payment of the under deduction from the employee nor had she on submission of the P35 and other papers to HMRC recorded that there was an error. What she had done was explain to the employee that the P60s from all her sources of income should be taken by her to her tax office. She could not advise the employee as she did not have all her personal details. She had however done an overview using the employee’s pension figures which she knew estimating figures as a guide for Mrs. Chander-Kumar. The next year also went through on an underpayment of tax. We were informed that the employee left employment with the Appellant on 9 January 2008.      

5.       HMRC notified the Appellant in a letter dated 12 September 2007 that although the year end return forms P35 and P14 showed the code numbers issued to it for operation in respect of the employee’s pay the actual tax deducted was not in accordance with the tax tables.  HMRC had previously been in contact with the employee. The officer of HMRC Chris Mowbray who gave evidence to the tribunal  had not been involved but confirmed that an assessment had been raised though so far as he was aware no repayment of tax had been received from the employee.      

6.       It was submitted by the representative for the Revenue that this was a PAYE matter and that whilst it was accepted that the failure to deduct the excess was due to an error made in good faith (Regulation 72(3)(b)) HMRC was not satisfied that the employer took reasonable care to comply with the Regulations (72(3) (a)).Regulation 72 is headed Recovery from employee of tax not deducted by employer and sets out the applicable conditions which apply. The wording of Regulation 72(3) provides as follows:

 Condition A is that the employer satisfies the Inland Revenue- (a) that the employer took reasonable care to comply with these Regulations, and (b) that the failure to deduct the excess was due to an error made in good faith. It is stated in Regulation 72(4):Condition B is that the Inland Revenue are of the opinion that the employee has received the relevant payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments.

Conclusions

7.        The legal position is clear. Regulation 68 of the PAYE Regulations makes the employer liable to pay to the Revenue the amount which should have been deducted. (Regulation 68(2), (4). If the employer fails to deduct enough tax in any week it can recoup any shortfall from future payments in the same tax year. However it cannot do so once the tax year has closed. For this reason the tax year 2007-8 was not in issue before the tribunal though 2005-6 and 2006-7 were. The onus is on the Appellant to show that it took reasonable care  

8.       The Appellant’s representative has not produced any clear evidence as to how the situation arose that the K code was not accepted. It was she who dealt with the payroll and tax and she should be the person to know. The discs were disposed of and thus it cannot be established if there had been any corruption of these and in any event as there would have been four of them in our view it is not probable that all over a period would have failed. It would normally be the case that immediate enquiry would be made of HMRC for information or a replacement disc.  Whilst Mrs. Chander-Kumar has told the tribunal that she did telephone them and she said was told merely to drop the prefix she could give no indication of when this was done and she made no note.  Mr. Mowbray said in evidence that HMRC had no record of a call and explained how replies are given from a script. It seems unlikely to us that a helpline operator would have given the advice claimed as it defeats the purpose of the prefix code which is to tax by deduction from wages untaxed income in excess of the employee’s allowances. Mr. Mowbray did put forward the possibility that the CDROM for 2004-5 had been used in error. Whatever may have been the circumstances the steps taken by the Appellant exhibit a lack of reasonable care.

9.       In any event as confirmed by the accountant’s evidence it was known early in the tax year 2006-7 that the PAYE deductions made were not in accordance with the code. It was perfectly apparent from the P11 produced at the tribunal hearing that on the change-over in 2005-6 from the use of the tax tables to the use of the CDROM the tax figures substantially decreased (commencing with a repayment to the employee) and the completion of the columns varied. To our mind there were enough discrepancies arising during the course of this tax year in comparison also with the previous year even with a reduction in hours to put Mrs.Chander-Kumar on notice. Further it would have been an exercise of reasonable care when changing systems initially at least to have run a check with the tax tables. In addition Miss Harrison as she had stated in her evidence gave an estimate of figures early in the subsequent tax year. The problem remained uncorrected for a second tax year and into a third.

10.    We find that the Appellant did not take reasonable care to comply with the Regulations. The position of the employee is not an issue before this tribunal. We are satisfied that there was no unreasonable delay on the part of HMRC in their processing of the matter.

11.    The appeal is dismissed.

12.    This document contains full findings of facts and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

ELSIE GILLILAND

TRIBUNAL JUDGE

RELEASE DATE: 16 April 2010