The EAT has held that informal directions from HMRC to an employer to account for PAYE are sufficient to bring a claim for unlawful deductions from wages within an exclusion in the Employment Rights Act 1996 and the tribunal therefore has no jurisdiction to hear the claim (Patel v Marquette Partners (UK) Limited).


Mr Patel had received substantial bonus payments in the tax years 2002/03 and 2003/04. They were paid as dividends on shares awarded to him by an employee benefit trust. In 2006/07, HMRC advised the employer that they would bring formal proceedings to recover unpaid tax and National Insurance contributions that they considered should have been paid in respect of the bonuses for the earlier years. The employer therefore deducted around £65,000 from Mr Patel's bonus in the tax year 2006/07 in respect of the unpaid tax and National Insurance contributions from the earlier years. Mr Patel raised a grievance and subsequently resigned. He claimed that the tax deductions amounted to an unlawful deduction from wages. The EAT upheld the tribunal's decision that it had no jurisdiction to hear his claim. HMRC's informal warning amounted to a "determination" within the exclusions set out in section 14(3) of the Employment Rights Act, thus preventing Mr Patel bringing a claim for unlawful deduction from wages. The purpose of the exclusion is to ensure that complaints are brought in the appropriate forum. It is not clear whether Mr Patel would have succeeded if he had complained under the tax appeal system alleging incorrect operation of PAYE.

Impact on employers

Where bonus and other incentive schemes are structured to mitigate tax, the employers and employees should be aware of the potential consequences and the tax risks should be explained to the employee. Employers are advised to ensure that, where tax has not been deducted, there are provisions within the contractual documentation allowing the employer both to recover back payments from the employee and deduct them from wages so they do not need to fall back on the PAYE Regulations to authorise recovery from the employee.