PAYE - Whose liability?

 22 Oct 2018

Pay-As-You-Earn (PAYE) was a feature introduced into the UK tax system right after the end of World War II, all due to the substantial and sudden increase in the number of people needing to pay taxes. A system that increased the complexity in regulations, but for the majority, PAYE comes with good news, as it relieves them of the need to file a tax return.

In addition to that, the responsibility to calculate and pay the employee's tax correctly is left to the payroll department and not the employee. This system makes sure that a vast majority of employees are correctly taxed at a relatively consistent amount throughout the year, helping bring up their liabilities to a close by the end of the tax year.  

Now, with that being said, it would be very highly recommended for everyone to keep a check on their tax affairs from time to time. New benefits pay rises, and changes in circumstances can render PAYE arrangements outdated and could cause the employees to fall into debt quickly without knowledge. 

What’s more, is that things can go wrong with the PAYE system during incorrect use of the system by payroll, by using the wrong code or even when the correct code was used there were miscalculations with the PAYE. 

Whose liability is PAYE? Surely it depends on who made the error. Sadly, incorrect.

Where a wrong code has been issued by HMRC, the PAYE rules do not enable HMRC to chase the employer for underpayments. What HMRC can do in a situation like this is to seek out for the employee and make right the underpayment by issuing an assessment or adjusting the subsequent year’s tax code correctly. However, cases like this are very rare.

When the payroll department has made an error, situations may arise such as the following from the HMRC website.

  1. Using a tax code without the HMRC authority.

  2. Incorrect use of the PAYE taxable pay tables. 

  3. Addition or mistyping of pay figures.

  4. Mistakes in setting up software for use in the new tax year. 

  5. Failure to follow guidance issues in employers help books or bulletins. 

  6. Failure to operate the right tax code upon the start of your employment.

  7. Failure to use the same tax code for a new tax year, where no new code has been issued.

  8. Failing to operate tax codes sent electronically by continuing with out of date tax codes. 

Whether a payroll department or an employee can be liable for the unpaid tax will depend on the application of reasonable care rules. To be more precise, if the payrolls department can prove that they took the proper care when it came to operating their PAYE system correctly, then the employee will be the one held responsible. Likewise, if it is proven that the payroll department managed the system incorrectly or did not take the proper care then the employer is the one who will be liable. 

As a final point, HMRC will be the one deciding if the employer's mistakes were made in good faith or not, this is the primary reason why it is vital for both the employee and the employer to protect themselves by keeping notice and a keen eye on systems, payments made and tax codes.

If you currently outsource your payroll, it can become a large struggle between your employee/business and the payroll company if this type of situation arises. We would strongly recommend exploring other companies available who offer various payroll packages.

Though there is known protection for the employees who find themselves facing debts and employers are to be entitled to appeal to HMRC if they feel a wrong decision so it is vital that a situation like this is avoided at all costs to prevent any of this issues.