Office of Public Sector Information

EXPLANATORY NOTE

(This note is not part of the Regulations)

These Regulations amend the Income Tax (Pay As You Earn) Regulations 2003 (“the PAYE Regulations”). The changes form three main groups: (i) amendments consequential upon the abolition of the starting rate of income tax, (ii) amendments to provide a further case where tax may be recovered from the employee, rather than the employer, and (iii) amendments affecting the way Revenue and Customs may recover tax. In addition, the opportunity presented by these Regulations is taken to replace some of the adjacent references to the Inland Revenue with references to “HMRC”.

This note orders discussion of the amendments by group, rather than the numerical order in which the regulations appear. With one exception, only substantive amendments are explained, it being assumed that the updating of references to the Inland Revenue is self-explanatory.

Regulations 3, 4, 12 and 13 form the first group of amendments. Abolition of the starting rate of income tax was effected by a resolution having statutory effect under the Provisional Collection of Taxes Act 1968 that was passed by the House of Commons on 18th March 2008 and which amended sections 6, 10 and 20 of the Income Tax Act 2007 (“ITA”) with effect from 6th April 2008.

Regulation 3 omits the definition of “starting rate” in regulation 2(1) of the PAYE Regulations. A new definition of “ITA” is inserted to facilitate the amendments to regulation 7 of the PAYE Regulations. The other amendments to regulation 2 are made in connection with the third group of amendments (see below).

Regulation 4 amends regulation 7 of the PAYE Regulations. In addition to removing references to the starting rate, the opportunity is taken to include references to the ITA provisions establishing the personal allowance and blind person’s allowance. These allowances have largely replaced their equivalents in the Income and Corporation Taxes Act 1988, but they do not apply to Commonwealth citizens and EEA nationals. As it is under the older statute that these persons must claim these allowances, the references to the 1988 Act have not been removed.

Regulations 12 and 13 remove the references to the starting rate in regulations 108(2) and 133D(1) respectively.

Regulations 6, 7, 9, 10, 14, 15 and 17 give effect to the new power to make directions. Regulation 6 makes consequential amendments to regulation 72D of the PAYE Regulations. This means that the supplementary appeal provisions for directions made under regulation 72 (the existing case where liability for a failure to deduct PAYE on payments made by employers may be transferred to employees) will apply to the new right of appeal against directions under the new regulation 72F as well (see below).

Regulation 7 inserts new regulations 72E to 72G. Regulation 72E sets out the conditions that must be satisfied before the new power in regulation 72F may be exercised. Broadly speaking, this will be when an employer has failed to deduct or account for tax in accordance with the PAYE Regulations and the employee has included tax in a self-assessment or paid it on account, or deductions have been made as if he were an independent contractor. Often this will be where persons who have been treated as independent contractors are recategorised as employees. Regulation 72F is the new power allowing HMRC to make a direction transferring liability for the PAYE tax to the employee. Regulation 72G is a new right of appeal allowing employees to challenge directions before the General or Special Commissioners.

Regulation 9 makes a consequential amendment to regulation 80 of the PAYE Regulations, so that amounts that are the subject of a direction under the new regulation 72F are not included if HMRC make a determination of tax owed by the employer.

Regulation 10 amends regulation 82 of the PAYE Regulations. The employer will not be liable for interest on the tax that is the subject of a direction under the new regulation 72F.

Regulation 14 amends regulation 185 of the PAYE Regulations, so that credit for amounts included in the new directions cannot be claimed by employees in reduction of their liability for self-assessment tax under the Taxes Management Act 1970.

Regulation 15 amends regulation 188 of the PAYE Regulations so that amounts for which an employer is no longer liable are not double-counted in calculating the tax payable by the employee.

Regulation 17 makes a consequential amendment to the savings provisions in Schedule 1 to the PAYE Regulations, so that the particular provision that is modified is referred to correctly in light of the amendment made to regulation 82.

Regulations 3, 8, 11 and 16 make changes to the way tax is recovered. Similar changes have recently been made in relation to earnings-related contributions (by the Social Security (Contributions) (Amendment No.3) Regulations 2008) and deductions under the construction industry scheme (by the Income Tax (Construction Industry Scheme) (Amendment) Regulations 2008). The relevant departments are expected to make similar amendments to the student loans repayment regulations applying in both Great Britain and Northern Ireland.

Regulation 8 amends regulation 78 so that HMRC may specify and certify a “combined amount”. A new definition inserted by regulation 3 defines this is an unpaid amount of tax, together with amounts of earnings-related contributions, construction industry deductions and student loan deductions that the employer is required to pay over to HMRC.

Regulation 3 also inserts a definition for “Student Loan Regulations”, which is an expression used in the definition of “combined amount”. This already appears in regulation 70(4) of the PAYE Regulations, but only applies to that regulation, rather than throughout, so it is moved. Regulation 70(4) is amended accordingly (by regulation 5). The definition in regulation 70(4) of “SSC Regulations” is omitted as well. There is a definition of that expression in regulation 2(1) of the PAYE Regulations that applies in any event.

Regulation 11 amends regulation 84 to enable HMRC to take proceedings to recover combined amounts specified under regulation 78, and interest, without the need to identify each individual component.

Regulation 16 amends regulation 218 to enable certificates to be prepared in respect of combined amounts and interest due on those combined amounts.

An impact assessment has not been produced for this instrument as no impact on the private or voluntary sectors is foreseen.