If a mistake by your payroll manager or your software causes an employee to pay insufficient tax, HMRC can demand the balance from you. In what circumstance might this happen and what steps can you take to avoid the problem?
The importance of software
Since the introduction of real time information (RTI) in 2013, operating a manual payroll isn’t really an option. You must put your faith in computer software. This places an extra burden on whoever operates your payroll. Not only do they need to understand the intricacies of PAYE, but the ins and outs of the software. Failure to do so can result in your business facing extra costs.
PAYE trouble
If an employee’s PAYE tax isn’t correctly calculated HMRC can use its powers to demand that your business picks up the bill. In the case of TJ Blanche v HMRC 2012 a problem with the employer’s (D) software resulted in the wrong code number being applied to TJ Blanche’s (TJB’s) wages, causing him to underpay tax of nearly £3,000. Initially HMRC demanded the tax from TJB, but he argued that he shouldn’t have to pay because D was at fault.
Wrong code
In its defence D said that TJB should have spotted the error in the code number because it was on his payslips. In fact it later came to light that he had noticed the mistake and told HMRC about it. D then argued that TJB should have informed it about the discrepancy as soon as he noticed rather than let it continue. The tribunal agreed, but surprisingly considered D’s point irrelevant.
Trap. Because the Income Tax (Pay As You Earn) Regulations 2003 (PAYE 2003) apply only to employers they have no bearing on an employee’s actions.
Reasonable care
Where a PAYE error occurs and this results in an underpayment of tax, HMRC can opt not to collect it from the employer as long as they prove that they took reasonable care to avoid it. In our experience HMRC tends to give employers the benefit of the doubt, but you shouldn’t take this for granted. Also bear in mind that tribunals often side with the employee.
Computer or human error?
Interestingly, in this case D’s software supplier knew about the problem with its program and had warned users it might result in an incorrect code. The trouble was that the employee responsible for D’s payroll had either not read the warning or had overlooked it. So the tribunal decided that D was at fault because it had not taken reasonable care in operating its payroll software. Even though the software caused the underpayment of tax, as the employer D had responsibility to ensure that the tax calculations were correct. PAYE 2003 only apply to employers, not employees or software companies, so D had no legitimate excuse.
Tip. Ensure your payroll staff are trained in using software and keep up to date by reading notices sent by the software company. Keep the notices and ask employees involved with payroll to sign and date these after they have read them. If an error does occur, this should be enough to prove to HMRC that you’ve taken reasonable care and therefore are not liable for any tax underpaid.
HMRC will hold you responsible for problems with your payroll software. But if you can show that your payroll staff are trained and kept up to date with software issues, it can’t demand the underpaid tax from you. Make sure that staff read service notices etc. issued by the software company and keep a record of this