The Special Commissioner held in Demibourne Ltd v HMRC that the employer is responsible for the deduction of tax under PAYE where an employment relationship exists. HMRC did not have the discretion to elect whether to collect tax from either employer or employee unless there had been a special Direction to do so. An employee was always entitled to treat as deducted any tax that the employer was liable to deduct whether or not that tax was actually deducted. This meant that HMRC had to recover PAYE from the employer even if tax had been paid in relation to the employee under Self Assessment. The Income Tax Amendment Regulations 2008 SI 2008 No. 782 extend the circumstances in which HMRC can direct to transfer an outstanding PAYE liability from an employer to an employee where the employee received a payment from an employer from which the employer should have deducted PAYE and:

  • Tax on that payment has been included in self assessment; or
  • No self assessment has been made but tax has been paid as self assessment payments on account; or
  • Tax has been deducted as a sub-contractor deduction.

Clearly, employers should be aware of the application of these new rules in relation to workers, such as consultants, who might be reclassified as employees for tax purposes.