In our Newsletter last month, we commented on the proposal in the Budget Statement for transferring a PAYE liability from an employer to an employee where the employer is unable to pay the liability. The Budget Statement indicated that the power for HMRC to transfer an unpaid PAYE liability (on a DR loan charge in April 2019) would only apply in cases where the employer was not located in the UK (“offshore employers”).
In a technical note dated 1 December, HMRC has confirmed that the new power, included in Part 4 of the draft Finance (No. 2) Bill which was also published on 1 December, will be restricted to unpaid PAYE liabilities of offshore employers. Unpaid PAYE liabilities of employers located in the UK will not be affected by the new power.
However, the technical note also confirms that HMRC will use existing powers (in Regulations 80 and 81(3) of the PAYE Regulations) to collect unpaid PAYE liabilities of UK employers from employees who have received disguised remuneration, including liabilities under the April 2019 loan charge.
One positive aspect included in the technical note was the clarification, in cases where an employer is unable to pay including cases where the employer has been dissolved or no longer exists, that the employee will not be liable for any unpaid Class 1 NICs due.
This latest technical note from HMRC, read in conjunction with their settlement terms published on 7 November, provides some much needed clarity on where individuals and employers now stand on the potential cost of settling their PAYE liabilities in relation to DR schemes. It is now clear that the ability of HMRC to collect tax from employees before 2019, in relation to contributions made to EBTs and EFRBS, will be determined by reference to the “step” in respect of which the PAYE liability arises. If the PAYE liability arises on the cash contribution made by the employer to the EBT or EFRBS under the “redirection of earnings” principle on which the Supreme Court based its decision in the “Rangers” case, HMRC will be unable to collect any unpaid PAYE liabilities from employees before April 2019, except in cases where they are able to transfer the labilities to directors under provisions in insolvency law.
In cases where the redirection of earnings principle applies, this could provide useful breathing space and an opportunity to prepare for future tax charges.
Conversely, if the obligation to operate PAYE arose on the “allocation” of the contributions by the trustee, on an appointment or transfer to a specified sub-fund, sub-trust or a trust for a specific individual or family, HMRC will be able to collect an unpaid PAYE liability from an employee, under existing powers in the PAYE regulations, before 2019. It remains to be seen whether HMRC will actively pursue collection of unpaid PAYE liabilities from employees under their existing powers or will wait until 2019 to collect the tax due. Every case will, presumably, be judged by HMRC on its own merits.
We now have as complete a picture as we are ever likely to have and in that context, it now makes sense for all employers and employees with disputed PAYE liabilities from DR schemes (or, in other cases where a loans charge will arise in April 2019) to evaluate their circumstances and decide on the best option for them in bringing the dispute to a close or, in understanding what liabilities will arise in April 2019.
If you would like to discuss your own situation, please contact us.