Where the employer has not taken reasonable care the employee may not have to make good the underpaid tax. What amounts to reasonable care was considered by the First-tier Tribunal in Thomas James Blanche (TC01697).
In July 2003 a company (D) employed B and deducted tax at the basic rate. B started working for a different company (H) in September 2005 but remained on D’s books and was not issued with a P45 by D. In January 2008 B ceased working for H, who gave him a P45 indicating that his tax code with H was 489L. He then resumed working for D in January 2006 but did not give them a copy of his P45. D continued to deduct tax from B’s wages at the basic rate. In 2006/07 D started using code 503L, which led to an underpayment of tax in 2006/07 and 2007/08. HMRC initially tried to recover the tax due from D but subsequently pursued B for the underpayment of tax under reg 72(5) Income Tax (PAYE) Regulations 2003. B appealed contending that D had not taken reasonable care.
The case was heard the First Tier Tribunal, where it was held that D did not take reasonable care in dealing with B’s tax code. D adopted an incorrect 489L tax code, updating it to 503L. This was done without any authority and would not have happened if proper care was taken. In May 2006, HMRC issued a BR Coding Notice to D. The BR Coding was never activated and tax continued to be deducted in line with code 503L. The error arose because D used two payroll systems in conjunction with one another and although D entered the basic rate tax code on one payroll system, this entry was overridden by the second system. The training manual, to which all the payroll operatives had access, clearly stated that entry should have been made on both payroll systems. The fact that the payroll operatives rarely had to enter a re-coding on the system was not an excuse for the failure to adhere to the instruction manual.
This case also raised an interesting point as to whether the conduct of the employee should be taken into account. B maintained that he never looked at his payslips as these were dealt with by his wife. In any event, his earnings varied on a monthly basis and he claimed that an incorrect deduction to tax would not have been apparent to him. It was held that the fact that B should have realised that there was an underpayment of tax was irrelevant. The issue to be considered was whether the employer took reasonable care and as such the conduct to be considered was that of the company.
For further help on the deductibility of underpayments of tax contact the TaxDesk on 0845 4900 509 and ask for Priya Dutta.