Annually on the 19th May,
companies or persons that are PAYE registered are obliged to file a P35
return with HMRC. Professional Contractors and Freelancers who are
trading inside IR35 have to declare the PAYE deducted on the deemed
payment.
As both a Director and/or an
employee of a Limited Company many Professional Contractors and
Freelancers do not realise that they could be personally liable to
repay hundreds of thousands of pounds worth of PAYE; subject to
a Direction under Regulation & 72(5) Condition A or B being applied.
What happens if a company has declared the wrong amounts of PAYE?
If HMRC find that the wrong
amounts of Tax and NICs have been declared (or not), they have 2
courses of redress ( known as Condition A and B ), two entities to
address them to and no time limits in which to apply them:
- Was the under deduction an honest failure? – Regulation 72(5) Condition A
- Was the under deduction a dishonest or wilful failure? – Regulation 72(5) Condition B
Direction under Regulation 72(5) Condition A
Although initially it is the
employer who carries the liability to deduct PAYE;
under Direction 72(5) Condition A, HMRC possess the power to settle or
make liable any underpaid or non-declared PAYE on the employee or
director if they deem that the error or failure was an honest error on
the employer’s behalf.
To action this, HMRC must
first satisfy themselves that the employer took “reasonable care to
comply with the PAYE regulations”, and that “the failure to deduct the
correct amount of tax was due to an error made in good faith”
Professional Contractors and
Freelancers who operate their business through one director
owned limited companies are both the employer and the employee with
regards to their limited company.
If the company became the
subject of an IR35 investigation and it was later found that the
Limited Company had actually been operating in a manner which placed
them inside IR35, but had declared a P35 to be operating Outside IR35
the Limited Company would then owe HMRC a potentially large amount of
PAYE.
HMRC could then seek a
Direction under 72(5) Condition A to hold either the employee or the
director of the Limited Company liable for this extra PAYE if they have
satisfied themselves that the employer had took reasonable care to
comply with PAYE regulations.
By virtue of Regulation 72(7)
& (8) interest on top of the amount owed will apply and
possibly penalties if HMRC assess that either the employer or
employee didn’t take “reasonable care and acted in good faith when
making the error”.
Professional Contractors and
Freelancers need to be aware then, that in cases of IR35 dispute , HMRC
could hold the worker/director/employee personally liable for the
unpaid PAYE where the dispute is lost, even in cases where the
employee/director did all they could to satisfy themselves that they
were outside IR35.
Umbrella Company employees may
well need to consider carefully their expense claims as if they have
claimed expenses in error, but HMRC are satisfied that the employer has
done everything in their power to operate PAYE correctly, the employee
could be liable under a Regulation 72(5) Direction.
Regulation 72(5) Condition B
Under Regulation 72(5) condition B HMRC can seek to settle the debt onto the director of the company where:
- “An employee or director
received payments knowing that the employer had wilfully (that is
deliberately) failed to deduct the correct amount of PAYE from their
earnings, and
- the prospects of recovery from the employee or director are reasonably good
The regulations are used most
frequently against directors in small private limited companies where
they are in effect acting in two capacities:
- as the employer paying themselves employment income and
- as an employee
There must be firm evidence that the
director at the time of the relevant payment had some stake in, or
control of, the business finances of the company or was in a position
to exercise such control”.
So in a case where a
Professional Contractor and Freelancer deliberatly ignores IR35
regulations and does not declare a deemed payment on a P35 then HMRC
may seek a Direction under Regulation 72 (5) Condition B and hold the
director of the Limited Company personally liable for the PAYE.
Company Closure
If
a striking off order has been applied to close the company, Companies
House will write and advise the Inland Revenue to ensure all debts are
paid before the company is removed from the register.
HMRC can object to a company
being closed should they wish too, in particular they will do if
returns are outstanding or they wish to open an enquiry.
If HMRC choose to apply
Regulation 72(5) Condition A and B , then regardless of whether the
company is struck off or not; HMRC can settle the debt on to the
employee or director.
Conclusion
Professional Contractors and
Freelancers can be held personally liable for the PAYE debts in
relation to their personal income from either a Limited Company or an
Umbrella Company. There is no time limit for HMRC to use these powers,
and it makes no difference if a company is closed down.