Posted: 26 May 2010
Issue: Vol 165, Issue 4256
Categories: Readers' Forum

Must a benefit in kind from one employment that is otherwise unpaid be included in the PAYE code number of another, paid, employment?

I have received a coding notice for a client who has two employments: one an ‘ordinary’ job that pays a salary; the other as director of a small company through which he is provided with a company car, but from which he draws no salary.

He also has significant investment income.
 

This year, for the first time, HMRC have included an adjustment in the PAYE code for his salaried employment in respect of the car benefit from his directorship.

I realise that it is open to them to include entries in a tax code that take account of other income not directly related to that particular employment, e.g. state pension, savings income at higher rates, but I’ve never come across benefits from a different employment being included before.

Is this permissible or can I insist that it is removed, in the same way that a tax adjustment for higher rate savings can be taken out, in which case, tax is accounted for in arrears?

I have researched this extensively, but not found anything that is in point and would appreciate readers’ thoughts.

Query 17,600 – Sal.

Reply by Cello Boy

The authority for HMRC to collect tax via PAYE is outlined in ITEPA 2003, s 684(1) – ‘The Commissioners must make regulations … with respect to the assessment, charge, collection and recovery of income tax in respect of all PAYE income’.

ITEPA 2003, s 683 defines PAYE income as being from an employment, pension, or social security.

Car benefits are included under s 683(2)(b) which clarifies the ‘meaning’ of PAYE income and takes us to ITEPA 2003, s 10(3), which then directs us to Part 6 (i.e. Part 6 Ch 3; and from s 114 on car benefits).

Regulation 14 of the Income Tax (Pay As You Earn) Regulations SI 2003 No 2682 instructs HMRC in determining a tax code that they ‘must have regard to the following matters so far as known to them … any PAYE income of the employee (other than the relevant payments in relation to which the code is being determined)’; and I interpret that to mean including any other PAYE sources apart from that to which the code will be issued.

As mentioned by Sal, it is a taxpayer’s right to exclude non-PAYE income from their code. ITEPA 2003, s 684(1)(A) gives provision ‘for deductions to be made, if and to the extent that the payee does not object, with a view to securing that income tax payable in respect of any income … which is not PAYE income is deducted from PAYE income of the payee’.

This latter section is the one that gives us authority to tell HMRC not to include restrictions for non-PAYE income such as investment income within a client’s code i.e. if the payee does not object.

We often do object, as we say that the relevant clients are entitled to the cash flow advantage of paying such tax through self assessment; although for some clients who like to budget, such as some pensioners, we do agree that collection via PAYE is suitable.

So what of PAYE income and the car-in-the-code?

I revisited the legislation and wondered if the ‘must have regard’ of Reg 14(b) made it mandatory for HMRC to include the car benefit in Sal’s client’s code, or is it still discretionary?

‘Must have regard’ could be interpreted as ‘must at least consider, but not necessarily to include’.

ITEPA 2003, s 685(7A) does say that nothing in the PAYE regulations may be read as ‘preventing the making of arrangements for the collection of tax … in such manner as may be agreed by, or on behalf of, the payer and HMRC’. HMRC’s PAYE Manual at PAYE13075 gives instances where codings can be changed at the taxpayer’s request, even where an underpayment would remain to be collected by other means (the age-related allowances example for instance).

I therefore believe that Sal’s client can seek agreement for the car to be removed from the code (as long as they are or will become a self-assessment taxpayer and tax can be collected outside of the code).

HMRC is not obliged under law to do so, but PAYE13075 indicates it is negotiable. If agreement cannot be reached with HMRC, then appeal can be made under Reg 18 of SI 2003 No 2682.

Reply by N.K.

This method of using taxpayers’ coding notices is something which originated from the updating by HMRC of the whole PAYE system.

The occurrence of the allocation of the basic rate (BR) band to another source of income had been experienced occasionally in the past, but now under the new system this occurs much more frequently.

Benefits in kind are a source of income under which taxpayers do not have the right to refuse an appropriate deduction under PAYE via a notice of coding in order to collect the tax due in the year concerned.

As readers are no doubt aware, the explanatory notes to 2010/11 coding notices stipulate whether the taxpayer has the right to request deletion of any deductions (e.g. higher-rate (HR) tax on savings income), by the tax office concerned, but benefits in kind are not one of those.

A tax code reflects an individual’s allowances and deductions, liability to lower or higher rates of tax and can also take into account any other sources of income he or she may have.

Evidence that a company car benefit relating to one employment may be included in a notice of coding relating to another employment may be found in HMRC’s PAYE Manual under the ‘Deductions’ section of PAYE11040 (‘P2 standard notes’).

Also, under PAYE12035 (‘Benefits in kind’), the manual states:

‘Include benefits in kind in the code whenever you can. If they arise from a secondary source, record the benefits in kind against that employment on income, allowances, benefits and deductions. The benefits in kind will be included in the tax code for the primary employment source.’

It should be remembered that the idea behind ITEPA 2003, s 685 (tax tables) is that HMRC collect, as far as possible, the correct amount of tax payable under PAYE in the tax year concerned.

This is reflected in the Income Tax (Pay As You Earn) Regulations SI 2003 No 2682, Reg 14 (‘Matters relevant to determination of code’) which requires HMRC, when determining a code, to take account of all relevant and known matters, so that the obligation under s 685 is satisfied.

Also, I would quote from the PAYE Manual at PAYE12045 which, under the section ‘Requests for expenses deductions to be removed from tax code’, states that ‘the legislation does not permit us to agree to over deductions and cannot be disregarded just because an agent or employee wants us to.

The whole purpose of establishing tax codes in PAYE is to enable the correct amount of tax to be deducted from the employee; the employee will have the benefit of paying less tax during the year.’

Reply by Jim

It appears that Sal is trying to achieve a measure of cash flow by having the car benefit removed from the non-car employment coding, but it further appears that HMRC may prove difficult to sway on the matter.

The legislation for determination of PAYE code numbers can be found at the Income Tax (Pay As You Earn) Regulations SI 2003 No 2682.

Regulation 13 stats that ‘The Inland Revenue must determine the code for use by an employer in respect of an employee for a tax year’, while Reg 14(1)(b) states that ‘... the Inland Revenue must have regard for any PAYE income of the employee …’.

There is no specification as to what PAYE income must be regarded or disregarded.

From this silence, it does therefore appear a fait accompli and a perhaps a rare occasion of the Revenue getting the PAYE coding correct.

 Under the same regulations, Sal has the right to object/appeal against the coding determination (see Reg 18), with the inevitable hearing by the First-tier Tribunal should no agreement be reached.

However, it is felt that the authoritative auxiliary ‘must’ leaves no doubt as to the winner here.

Sal should be aware that any contentious coding appeal would preferably be dealt with by the Revenue at the year end in accordance with their guidelines (EIM71425), so there is little chance of excluding the car benefit whilst any administrative wheels are in motion.

Conversely, Sal could simply ask for the coding to be amended to remove the car benefit; on the basis that if you don’t ask, you don’t get.

An alternative might be for a very nominal salary to be paid via the car company and a PAYE coding operated against the new salary source, with a request to include the car benefit.

Any shortfall in tax would then be picked up for payment under the normal self assessment due dates for payment. But is the annual administration involved worth the hassle?

Sal should also be aware that the subtle difference between a car benefit and savings income, etc. is that the latter is not PAYE income and is specifically excluded from the category of what must be regarded in determining a PAYE coding (Reg 14(1)(f).
 

Share this page

• Add new comment
• Printer-friendly version