Tax - PAYE and who is liable

[Mendi]

If you are employed and your employer has registered you as PAYE, what happens if the employer then fails to pay your PAYE (but continues to pay you your net salary)?

Friend of mine is in this situation and paranoid that HMRC will come after her for the tax. At the same time, she does not want to leave her job without another to go to, as she would not be able to claim JSA for 3 months.

I said I am fairly sure only the employer can be liable for the tax in these circs but would love a second opinion as I'm not a tax lawyer!

Employer is in major shit.

It is the employers responsibility. No question.

Employers liability to deduct under PAYE but your friend's obligation to pay tax. HMRC can come after either but generally go after the employer.

Absolutely the employer, who is also in line for a 100% fine of the unpaid tax and NI.

Differing opinions then... Virgil you're the outlier! I can't see how, if the employee continued to be paid the same net pay without notice of a salary reduction, she could be liable because the employer has withheld pay in respect of her tax but has not passed it on to HMRC. Can you elaborate?

Hopefully, your friend has the payslips. The employer will be in line for prosecution if they haven't been paying the tax but I think perhaps these payments can be made in retrospect to HMRC. Not quite sure on this though. And how exactly does your friend know the money has not been passed on.

She knows it hasn't been passed on because (weirdly) she gets on quite well with her employer and likes her job even though the employer hasn't paid her at all for 3 weeks (normally gets paid weekly). Employer has told her they have cash flow problems and that they haven't even been able to pay the PAYE recently.

She doesn't get payslips but has her contract which says 'your gross salary will be X' and can show that the payments into her bank account are the net of X.

They give the employer the duty to deduct tax at source. That shifts the responsibility to the employer, who they will pursue, not your friend.

I cannot think of any cases when thousands of UK companies go bust every year with their main debt to HMRC when HMRC pursue the employer. I suspect Virgil is right however that technically the employee owes the tax and in theory HMRC pursue employee and employee then tries to claim against employer but think in practice HMRC just would never do that. In fact may be there is a law saying if PAYE is operated the employee ceases to be liable. I am not sure. I would not worry about it.

probably not paid NI either which will affect any future JSA claim . Employer is in it big time and HMRC will pursue them first. They can dissolve the company (sorry she'd lose her job anyway if so) and will be first creditor.

Seeing as how RtI just came in where the employer has to declare everything up front they are in major doo doo.

Doesn't sound good

In these kinds of cases HMRC (i.e. we hard working tax payers) do not get a penny. The company goes bust and they do every day of the week and often the main creditor if HMRC. I am not sure what happens to someone's NI record however if the employer and employee NI has not been paid for say a year.

Tell her to get another job ASAP. They must have desperate cash flow probs to do that and they are probably about to go bust.

If she can demonstrate that the employer contracted to pay her a higher sum then she will be fine. If she can't then HMRC may conclude it has been a cash in hand relationship in which case the liability to tax will remain hers (although both she and the employer would be in trouble).

HMRC can go after either the employer or the employee for tax on income. If the employer has committed to deduct at source via PAYE though and your friend has her contract and is therefore able to demonstrate that she has only received the net sums she should be fine.

The employer operates the tax payment system on behalf of the employee and so by failing to pay the tax the employer has effectively stolen it from your friend.

Xenia I'm not sure what happens about the NI position either. I will find out.

Virgil you are completely wrong.

It is the employers responsibility to operate PAYE correctly and hand over the payments to HMRC.

There is only one situation where HMRC may decide to persue the employee and that is where they believe that the employee has deliberately engineered the situation e.g. if they are a director of the company or run the payroll.

I am not wrong. Liability to pay tax is the individuals. I have said that the friend will be fine if she can demonstrate that she is an employee contractually entitled to a higher (gross) sum than she has been receiving and where the employer has committed to deduct at source via PAYE.

Virgil my friend satisfied both requirements.

Hopefully she'll be ok then - though I have told her to look for another job!

I'd be inclined to tell her to report it to HMRC too (although I appreciate that she likes and gets on with her boss and might not wish to do this).

She will have a claim for unlawful deductions from wages if she hasn't been paid.

"Liability to pay tax is the individuals."

In the case of tax (and national insurance) on employment income that is not the case: this liability is placed on the employer (now by R 68 of the The Income Tax (Pay As You Earn) Regulations 2003) and can only be transferred to the individual under very limited circumstances such as those I described.

look under employers responsibility

MrAnchovy is right. The only time HMRC would chase the employee is if they have the position to influence the payroll, to put it simply. Usually a director, although very ocassionally it may be a key employee.

As for the effect of unpaid NI, this could not affect any JSA claim as the information that the NI has not been paid (or even that any was due) will not be available to DWP.

Nor is there any impact on eligibility for SMP, SSP or any other statutory payments.

There may be an impact on accrual for the basic state pension.

Yes, it was pension I was thinking of under the rules or new rules that you need 35 years NI to get your £140 a week. So if for 2 of those years your employed did not send the NI to HMRC then you might lose a bit although most people work more than 35 years anyway.

It used to be the case that it was a legal requirement to get a payslip that showed the gross pay, the tax/NI/pension deducted and the net pay.

Don't know if that's still the case.

I am sure it still is.