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21 February 2001
Daylight Robbery?
Only the Revenue can correct the double taxation which can arise following some employment status disputes. Will Heard BA asks why it will not co-operate.
Recently, an article in the Inland Revenue's Tax Bulletin (No 50) announced, with much sorrow, that someone had 'inadvertently' removed part of the regulations affecting interest payable on tax paid late when amending the rules to accommodate the new style section 86, Taxes Management Act 1970 interest. This meant that the Revenue had overcharged interest on tax paid late in about 7,000 cases.
Only the Revenue can correct the double taxation which can arise following some employment status disputes. Will Heard BA asks why it will not co-operate.
Recently, an article in the Inland Revenue's Tax Bulletin (No 50) announced, with much sorrow, that someone had 'inadvertently' removed part of the regulations affecting interest payable on tax paid late when amending the rules to accommodate the new style section 86, Taxes Management Act 1970 interest. This meant that the Revenue had overcharged interest on tax paid late in about 7,000 cases.
Daylight Robbery?
Only the Revenue can correct the double taxation which can arise following some employment status disputes. Will Heard BA asks why it will not co-operate.
Recently, an article in the Inland Revenue's Tax Bulletin (No 50) announced, with much sorrow, that someone had 'inadvertently' removed part of the regulations affecting interest payable on tax paid late when amending the rules to accommodate the new style section 86, Taxes Management Act 1970 interest. This meant that the Revenue had overcharged interest on tax paid late in about 7,000 cases.
The Bulletin article does not give any idea of the amount of overcharge but readers are assured that the Revenue is doing everything it can to identify the cases concerned and make recompense by repayment or otherwise.
Clearly the Revenue has set out to do right by the Taxpayer's Charter which, nearly ten years ago, stated that its subjects were expected to pay only what was due under the law and be treated with equal fairness.
Such honesty is to be applauded, but there are inequities within the system that run far deeper than a mere oversight by overworked civil servants as in the case quoted above. Indeed there are thousands of cases where Inspectors know (or had reason to know at the time) full well that taxpayers have needlessly paid tens of thousands of pounds in tax, yet not a single finger is lifted to seek them out and make the repayment.
These cases stem from the circumstances that often prevail when pay-as-you-earn auditors and Schedule E Compliance teams discover that an employer has failed to operate PAYE on payments to workers whom the employer considered to be self-employed at the time.
The status debate
The rules governing whether or not a worker is operating under conditions amounting to a contract 'of service' or 'for services' have been the subject of intense debate over many years and no doubt will continue to be so despite the efforts of the Revenue to give copious case history examples supporting its efforts to introduce the personal service company legislation in recent months.
There are few areas of business that are insulated from this problem because the pressure on business not to take on workers under contracts of service due to the enormous costs associated with such contractual relationships is immense. Whether it be locums in the medical world, independent radio stations utilising entertainers to read the news, pubs and clubs using 'bouncers', temporary bar and restaurant staff or plain old-fashioned labour-only workers in the construction industry, the immediate cost of administration, associated social and legal costs and the like probably bear down more heavily than the costs of operating pay-as-you-earn. The costs of failing to operate PAYE, however, are more expensive to all concerned in the long run if the Inland Revenue picks up the failure.
Determinations – and their cost
Employers can have an amount determined on them under the Statutory Instrument SI 1993/744 Regulation 49 (The PAYE Regulations) for failure to operate pay-as-you-earn in respect of past payments to workers, whether the failure was through ignorance in that both the contractor and worker genuinely believed at the time of payment that the worker was taxable under Schedule D and not under Schedule E, or through neglect or a deliberate act or omission.
The determination is deemed to be a tax assessment on the employer (see Regulation 49(7)) so it carries with it rights of appeal and a liability to interest but not directly to a financial penalty. However, a determination under Regulation 49 means that one or more annual returns of pay-as-you-earn deductions (forms P35) will be incorrect either through fraud or neglect so triggering a tax geared penalty under section 98A(4), Taxes Management Act 1970.
Given that the determination falls on the employer and is deemed to be an assessment on the employer and that the determination only has to be made by the Tax Inspector 'to the best of his judgment' (Regulation 49(2)), it is quite possible for a figure to be conjured up which is based on an estimated number of failures to operate pay-as-you-earn over an estimated number of years multiplied by estimated amounts of payment per worker even though the normal PAYE liability is calculated by reference to the payment of specific individuals under specific coding instructions. Moreover, the current whereabouts of the workers concerned may well be unknown.
On the other hand it is equally possible for the determination to be based on payments to known individuals whose current addresses are well known to the employer and/or the Inspector dealing with the compliance issue or alternatively are easily discoverable by the Inspector. In some cases the worker may still be utilised regularly by the employer but in many cases the worker will have moved on to other jobs and in the meantime he may have moved house or business address.
However, as noted above, the current whereabouts of any particular worker is of no immediate interest to the Inspector. His only concern is to determine an amount assessable on the employer and to penalise the employer for failure to operate pay-as-you-earn.
The financial cost to the employer of such a position is substantial. Not only has he paid the worker gross of tax but he will now have to pay, say, an average 23 per cent on every £100 that he paid to the worker, not to mention employers' National Insurance contributions of, say, 10 per cent or so of the gross emolument and interest on both the pay-as-you-earn and National Insurance contributions plus a financial penalty which might amount to another 20 per cent of the tax and contributions.
Double taxation?
But what of the worker whose employment gave rise to the newly discovered pay-as-you-earn liability on the employer? What if he has submitted accounts to the Revenue or a self assessment that includes the payments made by the employer and has paid tax under Schedule D on the payments? What is both the employer's and the worker's position in these circumstances?
Reverting back to the employer for a moment – is he not entitled to claim that the tax paid by the worker under Schedule D should be credited against that tax now assessed on him in respect of the same payment? The answer is negative. The two circumstances are mutually exclusive although some PAYE auditors and Schedule E Compliance Inspectors might be prepared to give credit tacitly in one way or another.
However, the employer might run other arguments to knock the auditor or Inspector off balance.
Under Regulation 42(2), the employer may try and satisfy the collector that he took reasonable care to comply with the regulations and that the failure to operate pay-as-you-earn was an error made in good faith. In these circumstances, the collector may direct the Inspector to recover the tax from the employee.
Similarly, under Regulation 42(3), the employer might try to convince the Board of Inland Revenue that the employee received his emoluments knowing that the employer had wilfully failed to operate pay-as-you-earn, in which case the Board may direct that the tax be recovered from the employee.
It may be taken as read that ignorance of the case law determining whether an individual worked under a contract 'of service' rather than 'for services' is unlikely to convince either the collector or the Board that tax should be collected from the employee, or more likely the ex-employee, particularly where the Inspector has to spend time trying to locate the current whereabouts of that party.
To try and make his case more convincing, the employer might ask the Inspector or auditor to track down the current whereabouts of the erstwhile worker. Either official will immediately answer that he has no remit to give this information to the employer even if he knew it or were able to find it.
The employer is therefore left high and dry. He will have to pay the full amount due even if the worker concerned declared the payment under Schedule D and paid tax on it.
A potential windfall
Now let us turn to the worker. Is he not entitled to have the tax he paid under Schedule D repaid to him with an interest supplement if the employer has been caught out in this way? The answer is in the affirmative as auditors and Inspectors will readily confirm.
How will the worker know that he is entitled to a repayment? The employer may now have no knowledge of the worker's whereabouts or may simply decline to contact the worker and inform him of the potential for a repayment.
The Inspector, on the other hand, has a computerised system to track down taxpayers even where full addresses are not available. Moreover, he is a civil servant whose job it is to ensure that taxpayers pay only what is due under the law and to treat them with equal fairness. He may have the names and addresses of the parties concerned, or may be able find them with little trouble, or may have to spend a little effort to track them down – yet he will do nothing of the sort.
There is no instruction in the Inspectors' manuals that the author has come across that instructs the Inspector or auditor to seek out such workers whom the Inspector/auditors knows to be entitled to a repayment of tax, even though the amount of repayment involved may well be in thousands of pounds.
In one case within the writer's knowledge, the amount of pay-as-you-earn tax claimed by the auditors amounts to tens of thousands of pounds covering three or four workers over a number of years. They work in an industry that would render it fairly easy to track them down, yet the Inspector concerned said that he had no intention whatsoever of doing so.
Theft by the Revenue?
The Revenue's views on people who evade tax and the financial and criminal sanctions that can flow from discovery of tax evasion are well known to readers of this article. The wilful failure even to attempt to track down parties entitled to substantial repayments of tax seems the reverse side of the coin.
If tax evasion amounts to stealing from the public at large, then the Revenue's failure to seek out a taxpayer entitled to substantial repayments must also amount to stealing from that individual. It amounts to an abuse of process through benign neglect of duty and is the stuff of judicial review.
The Inspector's Manual at paragraph IM5301 has the following comment about the meaning of judicial review:
'Judicial review can arise where an officer of the Department is believed to be refusing to carry out or delaying in carrying out his duties. An officer's actions or decisions may be reviewed if it is claimed that he has misinterpreted legislation, assumed powers to which he is not entitled or failed to exercise properly a discretion which has been given to him.'
What is the Inspector's duty in a case such as described above? It may be argued that the individual Inspector has no responsibility since there is apparently no instruction in this matter but there is clearly a collective responsibility. Therefore there ought to be such an instruction.
The Taxpayer's Charter (although no longer in existence, but supposedly part of the department's commitment to 'customers')was clear in this circumstance and is worth quoting more or less in full from the original wording lest we all forget the sacred guidelines:
'You are entitled to expect the Revenue –
To be fair –
by settling your tax affairs impartially
by expecting you to pay only what is due under the law
by treating everyone with equal fairness
To help you –
to get your tax affairs right
to understand your rights and obligations
by providing clear leaflets and forms
by giving you information and assistance at our enquiry offices
by being courteous at all times
To provide an efficient service –
by settling your tax affairs promptly and accurately
by keeping your private affairs strictly confidential
by using the information you give us only as allowed by the law
by keeping to a minimum your costs of complying with the law
by keeping our costs down
To be accountable for what we do –
by setting standards for ourselves and publishing how well we live up to them'
Action required
What should be done about this state of affairs? At the very least there should be a standing instruction to Inspectors in cases where there is a reasonable hope of tracking down a would be claimant that every effort should be made to find the person concerned; there should be instructions as to what means must be used and the results of that effort should be recorded on the relevant file.
Ideally there should be a central register accessible via the Internet (with appropriate publicity), which potential claimants could consult.
These measures would at least create the conditions whereby the potential claimant had a fighting chance to get the repayment due to him.
Will Heard specialises in tax investigations. He may be contacted on 01676 532159 or via www.specialtax.co.uk.
Only the Revenue can correct the double taxation which can arise following some employment status disputes. Will Heard BA asks why it will not co-operate.
Recently, an article in the Inland Revenue's Tax Bulletin (No 50) announced, with much sorrow, that someone had 'inadvertently' removed part of the regulations affecting interest payable on tax paid late when amending the rules to accommodate the new style section 86, Taxes Management Act 1970 interest. This meant that the Revenue had overcharged interest on tax paid late in about 7,000 cases.
The Bulletin article does not give any idea of the amount of overcharge but readers are assured that the Revenue is doing everything it can to identify the cases concerned and make recompense by repayment or otherwise.
Clearly the Revenue has set out to do right by the Taxpayer's Charter which, nearly ten years ago, stated that its subjects were expected to pay only what was due under the law and be treated with equal fairness.
Such honesty is to be applauded, but there are inequities within the system that run far deeper than a mere oversight by overworked civil servants as in the case quoted above. Indeed there are thousands of cases where Inspectors know (or had reason to know at the time) full well that taxpayers have needlessly paid tens of thousands of pounds in tax, yet not a single finger is lifted to seek them out and make the repayment.
These cases stem from the circumstances that often prevail when pay-as-you-earn auditors and Schedule E Compliance teams discover that an employer has failed to operate PAYE on payments to workers whom the employer considered to be self-employed at the time.
The status debate
The rules governing whether or not a worker is operating under conditions amounting to a contract 'of service' or 'for services' have been the subject of intense debate over many years and no doubt will continue to be so despite the efforts of the Revenue to give copious case history examples supporting its efforts to introduce the personal service company legislation in recent months.
There are few areas of business that are insulated from this problem because the pressure on business not to take on workers under contracts of service due to the enormous costs associated with such contractual relationships is immense. Whether it be locums in the medical world, independent radio stations utilising entertainers to read the news, pubs and clubs using 'bouncers', temporary bar and restaurant staff or plain old-fashioned labour-only workers in the construction industry, the immediate cost of administration, associated social and legal costs and the like probably bear down more heavily than the costs of operating pay-as-you-earn. The costs of failing to operate PAYE, however, are more expensive to all concerned in the long run if the Inland Revenue picks up the failure.
Determinations – and their cost
Employers can have an amount determined on them under the Statutory Instrument SI 1993/744 Regulation 49 (The PAYE Regulations) for failure to operate pay-as-you-earn in respect of past payments to workers, whether the failure was through ignorance in that both the contractor and worker genuinely believed at the time of payment that the worker was taxable under Schedule D and not under Schedule E, or through neglect or a deliberate act or omission.
The determination is deemed to be a tax assessment on the employer (see Regulation 49(7)) so it carries with it rights of appeal and a liability to interest but not directly to a financial penalty. However, a determination under Regulation 49 means that one or more annual returns of pay-as-you-earn deductions (forms P35) will be incorrect either through fraud or neglect so triggering a tax geared penalty under section 98A(4), Taxes Management Act 1970.
Given that the determination falls on the employer and is deemed to be an assessment on the employer and that the determination only has to be made by the Tax Inspector 'to the best of his judgment' (Regulation 49(2)), it is quite possible for a figure to be conjured up which is based on an estimated number of failures to operate pay-as-you-earn over an estimated number of years multiplied by estimated amounts of payment per worker even though the normal PAYE liability is calculated by reference to the payment of specific individuals under specific coding instructions. Moreover, the current whereabouts of the workers concerned may well be unknown.
On the other hand it is equally possible for the determination to be based on payments to known individuals whose current addresses are well known to the employer and/or the Inspector dealing with the compliance issue or alternatively are easily discoverable by the Inspector. In some cases the worker may still be utilised regularly by the employer but in many cases the worker will have moved on to other jobs and in the meantime he may have moved house or business address.
However, as noted above, the current whereabouts of any particular worker is of no immediate interest to the Inspector. His only concern is to determine an amount assessable on the employer and to penalise the employer for failure to operate pay-as-you-earn.
The financial cost to the employer of such a position is substantial. Not only has he paid the worker gross of tax but he will now have to pay, say, an average 23 per cent on every £100 that he paid to the worker, not to mention employers' National Insurance contributions of, say, 10 per cent or so of the gross emolument and interest on both the pay-as-you-earn and National Insurance contributions plus a financial penalty which might amount to another 20 per cent of the tax and contributions.
Double taxation?
But what of the worker whose employment gave rise to the newly discovered pay-as-you-earn liability on the employer? What if he has submitted accounts to the Revenue or a self assessment that includes the payments made by the employer and has paid tax under Schedule D on the payments? What is both the employer's and the worker's position in these circumstances?
Reverting back to the employer for a moment – is he not entitled to claim that the tax paid by the worker under Schedule D should be credited against that tax now assessed on him in respect of the same payment? The answer is negative. The two circumstances are mutually exclusive although some PAYE auditors and Schedule E Compliance Inspectors might be prepared to give credit tacitly in one way or another.
However, the employer might run other arguments to knock the auditor or Inspector off balance.
Under Regulation 42(2), the employer may try and satisfy the collector that he took reasonable care to comply with the regulations and that the failure to operate pay-as-you-earn was an error made in good faith. In these circumstances, the collector may direct the Inspector to recover the tax from the employee.
Similarly, under Regulation 42(3), the employer might try to convince the Board of Inland Revenue that the employee received his emoluments knowing that the employer had wilfully failed to operate pay-as-you-earn, in which case the Board may direct that the tax be recovered from the employee.
It may be taken as read that ignorance of the case law determining whether an individual worked under a contract 'of service' rather than 'for services' is unlikely to convince either the collector or the Board that tax should be collected from the employee, or more likely the ex-employee, particularly where the Inspector has to spend time trying to locate the current whereabouts of that party.
To try and make his case more convincing, the employer might ask the Inspector or auditor to track down the current whereabouts of the erstwhile worker. Either official will immediately answer that he has no remit to give this information to the employer even if he knew it or were able to find it.
The employer is therefore left high and dry. He will have to pay the full amount due even if the worker concerned declared the payment under Schedule D and paid tax on it.
A potential windfall
Now let us turn to the worker. Is he not entitled to have the tax he paid under Schedule D repaid to him with an interest supplement if the employer has been caught out in this way? The answer is in the affirmative as auditors and Inspectors will readily confirm.
How will the worker know that he is entitled to a repayment? The employer may now have no knowledge of the worker's whereabouts or may simply decline to contact the worker and inform him of the potential for a repayment.
The Inspector, on the other hand, has a computerised system to track down taxpayers even where full addresses are not available. Moreover, he is a civil servant whose job it is to ensure that taxpayers pay only what is due under the law and to treat them with equal fairness. He may have the names and addresses of the parties concerned, or may be able find them with little trouble, or may have to spend a little effort to track them down – yet he will do nothing of the sort.
There is no instruction in the Inspectors' manuals that the author has come across that instructs the Inspector or auditor to seek out such workers whom the Inspector/auditors knows to be entitled to a repayment of tax, even though the amount of repayment involved may well be in thousands of pounds.
In one case within the writer's knowledge, the amount of pay-as-you-earn tax claimed by the auditors amounts to tens of thousands of pounds covering three or four workers over a number of years. They work in an industry that would render it fairly easy to track them down, yet the Inspector concerned said that he had no intention whatsoever of doing so.
Theft by the Revenue?
The Revenue's views on people who evade tax and the financial and criminal sanctions that can flow from discovery of tax evasion are well known to readers of this article. The wilful failure even to attempt to track down parties entitled to substantial repayments of tax seems the reverse side of the coin.
If tax evasion amounts to stealing from the public at large, then the Revenue's failure to seek out a taxpayer entitled to substantial repayments must also amount to stealing from that individual. It amounts to an abuse of process through benign neglect of duty and is the stuff of judicial review.
The Inspector's Manual at paragraph IM5301 has the following comment about the meaning of judicial review:
'Judicial review can arise where an officer of the Department is believed to be refusing to carry out or delaying in carrying out his duties. An officer's actions or decisions may be reviewed if it is claimed that he has misinterpreted legislation, assumed powers to which he is not entitled or failed to exercise properly a discretion which has been given to him.'
What is the Inspector's duty in a case such as described above? It may be argued that the individual Inspector has no responsibility since there is apparently no instruction in this matter but there is clearly a collective responsibility. Therefore there ought to be such an instruction.
The Taxpayer's Charter (although no longer in existence, but supposedly part of the department's commitment to 'customers')was clear in this circumstance and is worth quoting more or less in full from the original wording lest we all forget the sacred guidelines:
'You are entitled to expect the Revenue –
To be fair –
by settling your tax affairs impartially
by expecting you to pay only what is due under the law
by treating everyone with equal fairness
To help you –
to get your tax affairs right
to understand your rights and obligations
by providing clear leaflets and forms
by giving you information and assistance at our enquiry offices
by being courteous at all times
To provide an efficient service –
by settling your tax affairs promptly and accurately
by keeping your private affairs strictly confidential
by using the information you give us only as allowed by the law
by keeping to a minimum your costs of complying with the law
by keeping our costs down
To be accountable for what we do –
by setting standards for ourselves and publishing how well we live up to them'
Action required
What should be done about this state of affairs? At the very least there should be a standing instruction to Inspectors in cases where there is a reasonable hope of tracking down a would be claimant that every effort should be made to find the person concerned; there should be instructions as to what means must be used and the results of that effort should be recorded on the relevant file.
Ideally there should be a central register accessible via the Internet (with appropriate publicity), which potential claimants could consult.
These measures would at least create the conditions whereby the potential claimant had a fighting chance to get the repayment due to him.
Will Heard specialises in tax investigations. He may be contacted on 01676 532159 or via www.specialtax.co.uk.
