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Published: 24-Feb-2017

Ridgecrest Cleaning Services Pendergate Ltd v HMRC: (FTT – TC05505 – 23 November 2016)


This is an interesting case where an employer applying the wrong PAYE code meant that there was an underpayment of tax to HMRC. HMRC sought to recover the underpayment from the employer who then appealed against it. 


The appellant had employed two employees during the year 2010-11 whose earnings were subject to PAYE. HMRC sent the tax code notifications to the employer electronically in that they could be accessed by logging on to HMRC’s website. These online notifications referred to a tax code change for the employees. However, the appellant overlooked the online notification and applied the old codes (which were wrong) resulting in an underpayment in the sum of £972 to HMRC. In accordance with their internal guidance HMRC issued a standard letter showing the amount of tax due and asking the employer to explain if they had taken reasonable care to operate PAYE and had made the error in good faith, or if the codes had not been received, to confirm how the codes had normally been received and which records had been checked. HMRC then issued a Regulation 80 determination effectively putting the liability on the employer. 

The appellant argued that they took reasonable care to comply with the PAYE regulations and that any failure to deduct was due to an error made in good faith. The appellant also argued that the Regulation 80 determinations could not stand because although the employees’ PAYE codes were accessible to the appellant electronically via the PAYE online website, they had not given the required statutory consent for the codes to be sent through that medium. On that basis they asked HMRC to recover the tax due from the employees applying Regulation 72 of the The Income Tax (Pay As You Earn) Regulations 2003 (“the regulations”). HMRC contended that the medium the codes were sent was irrelevant and that in any case the required consent had been given by the appellant by signing up for PAYE online way back in 2004. Further HMRC refused to issue a direction under Regulation 72 to recover the dues from the employees, saying once it had issued a Reg 80 determination, Reg 80(3) prevented it from issuing a direction under Reg 72. 

The law in brief: 

Regulation 21 of the regulations requires an employer to deduct or repay tax by reference to the employee’s code. Where the code is amended Reg 20 requires HMRC to notify the employer of the amended code in a document that is sent to the employer or a person acting on behalf of the employer. Regulation 213 provides that tax codes could be notified by an approved method of electronic communications. Where there is an underpayment, Regulation 80 empowers HMRC, subject some conditions being met, to determine the amount of tax to the best of their judgment, and serve notice of their determination on the employer (in effect making the employer liable). Regulation 72 applies where the employer satisfies HMRC that they took reasonable care to comply with these regulations, and that the failure to deduct the excess was due to an error made in good faith. Subject to meeting some further conditions HMRC may issue a direction under Reg 72 relieving the employer of their liability to HMRC, and for the tax is recovered from the employee.   

The decision 

In relation to challenging HMRC’s refusal to withdraw a Regulation 80 direction under their statutory powers, the tribunal decided it was a matter outside the tribunal’s jurisdiction since it was in principle a matter falling within the remit of judicial review. However, the tribunal did not agree that registering online for PAYE online signified a consent for the purposes of Reg 213. As a result, the tribunal decided that in the absence of consent for electronic notices, the codes electronically sent to the taxpayer did not constitute an employee’s code. The tribunal also accepted the taxpayer’s assertion that it had not received the paper coding notices. The taxpayer’s appeal was allowed and the Reg 80 determinations of tax were reduced to zero.


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