[2010] UKFTT 354 (TC)

TC00636

Appeal number  TC/2009/16831

INCOME TAX – Income Tax (Pay as You Earn) Regulations 2003 –– Obligation of employer to deduct tax in accordance with the Regulations by reference to the employee’s code – Notification of change of tax code for particular employee not received by employer – Subsequent general notices P9X and P7X received by employer indicating that former tax code no longer valid and that HMRC should be contacted – Employer failing to contact HMRC or to use the correct tax code – Whether employer took reasonable care to comply with the Regulations (regulation 21(3)(a)) – No– Appeal dismissed

FIRST-TIER TRIBUNAL

TAX 

	MR JEFFREY SASIN	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

			TRIBUNAL: 	Dr Christopher Staker (Tribunal Judge)
					MR JAMES MIDGLEY (Tribunal Member)

Sitting in public in London on 23 July 2010

Mr H Lambert for the Appellant

Mr P Rowe for the Respondents

© CROWN COPYRIGHT 2010

DECISION

Introduction
1.	This is an appeal against a decision of HMRC dated 22 October 2009 not to make a direction under regulation 72(5) of the Income Tax (Pay as You Earn) Regulations 2003 (the “PAYE Regulations”) in respect of tax that the Appellant was required to deduct from payments to an employee in tax years 2004/05 to 2007/08.
The relevant legislation
2.	Regulation 8 of the PAYE Regulations states in relevant part as follows:
(1)	An employee's code is the code—
(a)	issued to an employer for use in respect of the employee for a tax year,
(b)	applied by these Regulations for use by an employer in respect of the employee, or
(c)	issued to an employee in accordance with regulation 142 (direct collection).
(2)	A code is issued to an employer if it is contained in a document that is sent—
(a)	to the employer, or
(b)	to a person acting on behalf of the employer,
by the Inland Revenue, and any code so issued is received by the employer for the purposes of these Regulations.
3.	Regulation 16 of the PAYE Regulations states in relevant part as follows:
(1)	If the Inland Revenue determine that the code for use by an employer in respect of an employee for a tax year remains the same as at the previous 5th April, the Inland Revenue need not issue a code to the employer.
(2)	If for any tax year the employer does not receive a code for an employee who was in that employer's employment on the previous 5th April, the code which applied on that date is treated as having been issued by the Inland Revenue for the tax year in question.
4.	Regulation 20 of the PAYE Regulations states in relevant part as follows:
(1)	If the code for use by an employer in respect of an employee is amended after notice of it has been issued to the employer, the Inland Revenue must issue the amended code to the employer.
(2)	An amended code is issued to an employer if it is contained in a document that is sent to the employer or a person acting on behalf of the employer by the Inland Revenue, and any code so issued is received by the employer for the purposes of these Regulations.
(3)	On making any subsequent relevant payment to the employee, the employer must deduct or repay tax by reference to the amended code.
(4)	Paragraphs (5) and (6) apply if there is a change or proposed change in the rates of any of the personal reliefs allowable under sections 257 and 257A of ICTA (personal allowance and married couple's allowance).
(5)	If the change or proposed change relates to the current tax year, the Inland Revenue may give notice requiring the employer, with effect from the date specified in the notice, to amend specified codes as directed.
(6)	If the change relates to the following tax year, the Inland Revenue may give notice requiring the employer to carry forward to the following tax year specified codes of the current tax year and adjust them as directed in the notice.
(7)	A code which has—
(a)	been amended by virtue of paragraph (5) in respect of the current tax year, or
(b)	been carried forward to the following tax year and adjusted by virtue of paragraph (6),
is treated as having been determined and issued by the Inland Revenue as the employee's code for that tax year.
(8)	A notice under paragraphs (5) and (6) may be issued to the employer or to a person acting on behalf of the employer.
5.	Regulation 21 of the PAYE Regulations states in relevant part as follows:
(1)	On making a relevant payment to an employee during a tax year, an employer must deduct or repay tax in accordance with these Regulations by reference to the employee's code, if the employer has one for the employee.
(2)	The employer must deduct or repay tax by reference to the employee's code, even if the code is the subject of an objection or appeal.
6.	Regulation 72 of the PAYE Regulations states in relevant part as follows:
(1)	This regulation applies if—
(a)	it appears to the Inland Revenue that the deductible amount exceeds the amount actually deducted, and
(b)	condition A or B is met.
(2)	In this regulation and regulations 72A and 72B—
	“the deductible amount” is the amount which an employer was liable to deduct from relevant payments made to an employee in a tax period;
	“the amount actually deducted” is the amount actually deducted by the employer from relevant payments made to that employee during that tax period;
	“the excess” means the amount by which the deductible amount exceeds the amount actually deducted.
(3)	Condition A is that the employer satisfies the Inland Revenue—
(a)	that the employer took reasonable care to comply with these Regulations, and
(b)	that the failure to deduct the excess was due to an error made in good faith.
(4)	Condition B is that the Inland Revenue are of the opinion that the employee has received relevant payments knowing that the employer wilfully failed to deduct the amount of tax which should have been deducted from those payments.
(5)	The Inland Revenue may direct that the employer is not liable to pay the excess to the Inland Revenue.
(5A)	Any direction under paragraph (5) must be made by notice (“the direction notice”), stating the date the notice was issued, to—
(a)	the employer and the employee if condition A is met;
(b)	the employee if condition B is met.
(5B)	A notice need not be issued to the employee under paragraph (5A)(a) if neither the Inland Revenue nor the employer are aware of the employee's address or last known address.
(6)	If a direction is made, the excess must not be added under regulation 185(5) or 188(3)(a) (adjustments to total net tax deducted for self-assessments and other assessments) in relation to the employee.
(7)	If condition B is met, tax payable by an employee as a result of a direction carries interest, as if it were unpaid tax due from an employer, in accordance with regulation 82 (interest on tax overdue).
(8)	The tax payable carries interest from the reckonable date until whichever is the earlier of—
(a)	the date on which payment is made, or
(b)	the date (if any) immediately before the date on which it begins to carry interest under section 86 of TMA.
7.	Regulation 72A of the PAYE Regulations states in relevant part as follows:
(1)	In relation to condition A in regulation 72(3), the employer may by notice to the Inland Revenue (“the notice of request”) request that the Inland Revenue make a direction under regulation 72(5).
(2)	The notice of request must—
(a)	state—
(i)	how the employer took reasonable care to comply with these Regulations; and
(ii)	how the error resulting in the failure to deduct the excess occurred;
(b)	specify the relevant payments to which the request relates;
(c)	specify the employee or employees to whom those relevant payments were made; and
(d)	state the excess in relation to each employee.
(3)	The Inland Revenue may refuse the employer's request under paragraph (1) by notice to the employer (“the refusal notice”) stating—
(a)	the grounds for the refusal, and
(b)	the date on which the refusal notice was issued.
(4)	The employer may appeal against the refusal notice—
(a)	by notice to the Inland Revenue,
(b)	within 30 days of the issue of the refusal notice,
(c)	specifying the grounds of the appeal.
(5)	For the purpose of paragraph (4) the grounds of appeal are that—
(a)	the employer did take reasonable care to comply with these Regulations, and
(b)	the failure to deduct the excess was due to an error made in good faith.
(6)	If on appeal under paragraph (4) that is notified to the tribunal it appears to the tribunal that the refusal notice should not have been issued the tribunal may direct that the Inland Revenue make a direction under regulation 72(5) in an amount the tribunal determines is the excess for one or more tax periods falling within the relevant tax year.
Background
8.	The following facts were common ground between the parties.  The Appellant employed Mr A Cowan from July 2002 to July 2007. When Mr Cowan commenced his employment with the Appellant, he handed over the P45 issued by his previous employer.  The Appellant took the code number from the P 45, 702H, and applied this to Mr Cowan’s earnings to calculate the deductions of PAYE income tax that the Appellant should make from those earnings. On behalf of HMRC, Mr Rowe stated that it was not disputed that the P45 was duly submitted by the Appellant, but that HMRC contended that there was no record of this ever having been received by HMRC.
9.	In April 2003, following a change in the income tax system, child tax credits were paid directly to the taxpayer rather than given by way of an allowance in the taxpayer’s tax code. As a result, revised code numbers were issued in respect of all employees who had previously claimed child tax credits, which resulted in a lower code numbers for these employees.  Mr Cowan was such an employee.
10.	HMRC’s case is that on 5 January 2003, Mr Cowan’s tax code for the year 2003/04 was amended to take this change into account, but that because the P 45 had not been received by HMRC, the revised code number would have been sent to Mr Cowan’s previous employer rather than to the Appellant.  On behalf of HMRC, Mr Rowe also stated that during the period of Mr Cowan’s employment by the Appellant, no subsequent notification of a tax code relating specifically to Mr Cowan was ever sent by HMRC.  Mr Rowe further acknowledged that even if any such notification had been sent by HMRC, it would have been sent to Mr Cowan’s previous employer rather than to the Appellant, given that HMRC had not received the P45 giving notice of the change of employer.
11.	After Mr Cowan left his employment with the Appellant, he took up work with a new employer who queried the details on Mr Cowan’s P45.  This led to a review by HMRC, and on 4 March 2009, HMRC stated in a letter to the Appellant that Mr Cowan had not paid the correct amount of income tax during the years 2003/04 to 2007/08 because the Appellant had operated incorrect PAYE tax codes during those years.  That letter requested payment by the Appellant of £2655.62 in full payment of settlement of the tax under-deducted and an explanation of how the under-deduction arose.  That letter also invited the Appellant to notify HMRC if he considered that he was not liable for payment of the under-deduction (see regulations 72 and 72A of the PAYE Regulations above).  Following further correspondence, in a letter dated 22 October 2009, HMRC stated that it had decided not to issue a direction under Regulation 72(5) of the PAYE Regulations as HMRC was not satisfied that the Appellant had taken reasonable care to comply with the PAYE Regulations as required by regulation 72(3)(a).  The Appellant now appeals against that decision pursuant to regulation 72A(4)-(6).
The evidence and the submissions of the parties
12.	On behalf of the Appellant, Mr Lambert submitted amongst other matters as follows.  HMRC never advised the Appellant of the correct tax code.  It was not disputed by HMRC that the Appellant had on the commencement of Mr Cowan’s employment duly sent the P45 to HMRC, and that the notification by HMRC of the new tax code would not have been received by the Appellant as it would have been sent to Mr Cowan’s previous employer. The Appellant duly submitted P14s and P35s every year, such that HMRC were aware that the Appellant was employing Mr Cowan and were aware of the tax codes being used by the Appellant and of the amounts of PAYE income tax being deducted by the Appellant.  It was submitted that if there was any error, HMRC should have notified the Appellant of this so that it could have been corrected in a timely manner.  If any error had been corrected within a year or two of the commencement of Mr Cowan’s employment, the Appellant would be liable for perhaps half of what he is said to owe now.  HMRC have accepted that the Appellant was acting in good faith.  Any error was a genuine mistake.  HMRC are more culpable and HMRC did not take reasonable care, as they had every opportunity to check the veracity of the figures but did not do so.  Mr Lambert said that there was a time in the past when HMRC would have detected such an error and notified the employer.  For the Appellant it is said to be troubling that all responsibility is placed on him and that HMRC considers itself to be absolved of all responsibility.  It would not be fair for a small business to be required to bear the consequences of HMRC’s failure.  Mr Lambert confirmed that at the time in question the Appellant’s payroll was done by the Appellant’s partner, who was also an employee, that a computer was not used for this purpose, and that the Appellant only had 2 or 3 employees at the relevant time.
13.	On behalf of HMRC, Mr Rowe submitted amongst other matters as follows.  HMRC does not dispute that the Appellant duly submitted the P45 for Mr Cowan on the commencement of his employment, and that the Appellant would not have received notification of the new tax code for Mr Cowan sent in January 2003, as this would have been sent to Mr Cowan’s previous employer.  On this basis, HMRC concedes that although there was an under-deduction of tax in 2003/04, this could not be attributed to any failure on the Appellant’s part, and therefore HMRC have not pursued him for the under-deduction in that tax year.
14.	However, Mr Rowe submitted that in relation to subsequent years, the Appellant had been issued with notices P9X (which are issued with employer’s packs annually) and P7X (issued annually to reflect changes in the budget).  Copies of certain of these forms were in evidence before the Tribunal.  Notice P7X(2003) for instance, which gives notice of tax codes to be used by employers from 15 June 2003, stated that:  “Suffixes A and H are no longer in use from 2003-04.  You should have received a new tax code showing a new suffix.  If exceptionally, you have carried forward a code with either of these suffixes, contact your Inland Revenue office”.  Notice P7X(2004), which gives notice of tax codes to be used from 18 May 2004, contains a similar statement.  Notice P9X(2005), which was part of the employer’s pack for tax year 2005/06, states that “If a tax code ending in A or H is being carried forward contact your Inland Revenue office immediately”.  A similar statement is contained in notice P9X(2006).
15.	The HMRC case is that the tax code for Mr Cowan in the P45 was 702H.  Therefore, even if the Appellant did not receive the notice of the change in tax code sent in January 2003 (because this was sent to Mr Cowan’s previous employer), the Appellant should have contacted HMRC in response to the notices P9X and P7X, which required him to do so and which stated clearly that suffix H was no longer in use.  Mr Rowe submitted that because the Appellant had not contacted HMRC as required in those notices, he had not taken reasonable care within the meaning of regulation 72(3)(a) of the PAYE Regulations.  Mr Rowe stated however that HMRC accepted that, for purposes of regulation 72(3)(b), the failure to deduct the excess was due to an error made in good faith.
16.	Mr Rowe submitted that it was apparent from the P14s submitted by the Appellant that the Appellant had received the notices P9X and P7X.  He submitted that although the P14 of 2004/05 stated that the final tax code was “9999Y”, from the figures it can be calculated that the tax code used was in fact 715H.  He submitted that although the P14 of 2005/06 stated that the final tax code was “700H”, from the figures it can be calculated that the tax code used was in fact 730H.  Mr Rowe said that this indicated that the Appellant had followed the instruction in notice P9X(2005) which stated “add 15 to any tax code ending in L, for example old tax code 474L becomes 489L”.  The P14 of 2006/07 stated that the final tax code was “744L”.  Mr Rowe said that this indicated that the Appellant had followed the instruction in notice P9X(2006) which stated “add 14 to any tax code ending in L, for example old tax code 489L becomes 503L”.  The P14 of 2007/08 stated that the final tax code was “763L”.  Mr Rowe submitted that the evidence showed that the Appellant had read part of the information on the notices P9X and P7X, namely that relating to increases in tax codes, but not the information requiring him to contact HMRC in the event of a tax code with suffix H.  He submitted that the Appellant had therefore not taken reasonable care to comply with the Regulations.
17.	Mr Rowe stated that HMRC computer systems would not match up information contained in P14s with information contained in P45s in order to detect discrepancies.  He submitted that a notice P9X was a statutory notice authorising a change of tax code, which therefore had the same force as a notification expressly changing the tax code of a specified employee.
The Tribunal’s findings
18.	The Tribunal has considered all of the evidence and all of the arguments of both parties as a whole.
19.	On the basis of the evidence and the submissions of the parties, the Tribunal finds that on the commencement of Mr Cowan’s employment, the Appellant duly sent the P45 to HMRC, but that for unknown reasons HMRC has no record of having received it.  The Tribunal further finds that the Appellant never had any notice of the change of tax code issued in January 2003 since any such notice would have been sent to Mr Cowan’s former employer rather than to the Appellant.
20.	The Tribunal is further satisfied on the evidence as a whole, on a balance of probabilities, that the Appellant received the notices P9X and P7X in the relevant years in question.  These notices are sent to employers generally every year and in the ordinary course of events would have been received by the Appellant.  It would be unlikely that such a notice would be lost in the mail, and highly unlikely that all such notices would be lost in the mail over the course of several years. The Appellant did not contend that he had not received them.  Furthermore, the fact that the tax code used by the Appellant for Mr Cowan changed over the course of the years in question further suggests, as Mr Rowe submitted, that the Appellant did receive those notices and that the tax codes used by the Appellant were changed from year to year in line with what the Appellant (or his partner, who did the Appellant’s payroll) considered to be the instructions given in that notice.
21.	The Tribunal considers that there are two separate questions for determination in this appeal.  The first is whether the Appellant did in fact fail to comply with his obligations under regulation 21 of the PAYE Regulations, as contended by HMRC.  If the Appellant did not fail to comply with that obligation, it would follow that the appeal should be allowed without the need to consider the effect of regulation 72.
22.	However, if the Appellant did fail to comply with his obligations under regulation 21, the second question is whether the Appellant in all of the circumstances “took reasonable care to comply with these Regulations” within the meaning of regulation 72(3)(a).  It is noted that HMRC accept that the requirement of good faith in regulation 72(3)(b) is satisfied by the Appellant.
23.	As to the first question, the obligation of the Appellant under regulation 21 in the relevant tax years was to “deduct or repay tax in accordance with these Regulations by reference to the employee's code, if the employer has one for the employee”.  Pursuant to regulation 8(1)(a), “employee’s code” means a code “issued to an employer for use in respect of the employee for a tax year”.  There is no suggestion that regulation 8(1)(b) or (c) is applicable in this case.  Pursuant to regulation 16, if no new tax code is “issued” to an employer for a particular tax year, the tax code for the previous year continues to apply.
24.	Pursuant to regulation 8(2), a tax code will have been “issued” to the Appellant for purposes of that regulation if it was contained in a document sent to the Appellant or to a person acting on his behalf.  Regulation 20(2) makes similar provision in relation to changes in tax codes.
25.	It is not disputed that on commencement of Mr Cowan’s employment, the tax code on his P45 was 702H.  Mr Rowe accepted on behalf of HMRC that as the change of tax code issued in January 2003 would have been sent to Mr Cowan’s former employer rather than to the Appellant, this new tax code was not “issued” to the Appellant for purposes of regulation 20(2).  The last tax code of which the Appellant had formal notice was therefore 702H.  Although subsequent notices P9X and P7X stated that tax codes with suffix H had been discontinued and that HMRC should be contacted if any tax code ending in H was being carried forward, those notices did not themselves indicate any specific tax code that an employer was required to use for an employee in the circumstances of Mr Cowan.  Rather, those notices merely indicated that the previously notified tax codes with suffix H were no longer valid, and that HMRC needed to be contacted in order to obtain the correct tax code.  As the Appellant appears never to have contacted HMRC, it appears that he was never notified of the specific new tax code that he was required to use.  On a strictly literal interpretation of regulations 8, 20(2) and 21 of the PAYE Regulations, it might therefore be concluded that the Appellant was never “issued” with any tax code other than 702H, and that regulation 21 therefore never imposed any obligation on him to deduct tax in accordance with a tax code other than 702H.
26.	However, the Tribunal notes that even on this interpretation the Appellant would have failed to comply with regulation 21, and would have under-deducted tax, since the Appellant did not use tax code 702H in each of the years in question.  While the evidence may be less clear in respect of 2004/05 and 2005/06, it is clear from the P14s for 2006/07 and 2007/08 that in those years the Appellant used tax codes 744L and 763L respectively, which would have resulted in a deduction of less tax than tax code 702H.  As tax codes 744L and 763L were never issued to the Appellant, he would in any event have been in breach of regulation 21 in deducting tax in the relevant years in accordance with these tax codes.
27.	However, the position of HMRC goes further.  The HMRC position is in effect that the Appellant was required to use the correct tax codes even though he had not been formally notified of them.  This was in effect said to be because he had been notified through the notices P9X and P7X that tax code 702H was no longer valid and that he was required to contact HMRC for the correct tax code.  It was suggested that the Appellant could not rely on his own failure to contact HMRC as a reason for failing to apply the correct tax code.
28.	At the hearing, and in its subsequent deliberations, the Tribunal had some difficulty in reconciling this position with the text of regulations 8, 20(2) and 21.  The HMRC position in effect involves reading those provisions as deeming an employer to have been issued with a change of tax code if HMRC gives the employer notice that the old tax code is no longer valid and that the employer must contact HMRC to obtain the correct new tax code, whether or not the employer in fact does contact HMRC to obtain the correct tax code.  However, these provisions do not say this in terms.  At the hearing, Mr Rowe was asked whether he was aware of any other legislative provisions or case law that would further explain the practical operation of these provisions, and he said that he was not.
29.	The Tribunal notes that while the wording of these provisions does not in terms support the HMRC position, it equally does not in terms contradict the HMRC position.  These provisions state that a tax code or change in tax code is issued to an employer if it is contained in a document that is sent to the employer or to a person acting on behalf of the employer.  They do not state that this is the only circumstance in which a tax code can be regarded as having been issued.  The Tribunal considers that the purpose of these provisions is to ensure that deductions are made by an employer in accordance with the correct tax code.  In circumstances where a tax code has changed, an employer cannot be expected to apply the correct tax code if the employer has no notice that the tax code has changed.  However, where the employer has been given clear notice that the previous tax code is no longer valid, and that it is necessary for the employer to contact HMRC to obtain the correct tax code, it would in the Tribunal’s view defeat the purpose of these provisions of the PAYE Regulations if the employer could be entitled simply to ignore that notice.  The notices P9X and P7X gave the Appellant clear notice that tax code 702H was no longer valid.  The Tribunal considers that it would not be a reasonable construction of these provisions to conclude that the Appellant should nonetheless have continued to apply that invalid tax code until such time as he was specifically notified by HMRC of the correct new code.  Nor would it be a reasonable construction to suggest that the Appellant was under no obligation to make any PAYE deductions at all until such time as he was specifically notified by HMRC of the correct new code.  Nor would it be a reasonable construction to suggest that the Appellant should apply the tax codes that he actually did.
30.	The Tribunal finds that in the circumstances, the PAYE Regulations required the Appellant to contact HMRC to obtain the correct tax code, and that a consequence of the Appellant’s failure to do so was that the “deductible amount” exceeded the amount actually deducted, for purposes of regulation 72(1).
31.	In view of this finding it is necessary to consider the application of regulation 72(3)(a).  The Tribunal has found that the Appellant received the notices P9X and P7X.  The Tribunal considers that it does appear that the Appellant (or the Appellant’s partner) has tried to comply with those notices by amending the tax code each year in line with the amendments required to be made in respect of tax codes with suffix L.  However, it was overlooked that these notices stated quite plainly that codes with suffix H were no longer valid and that it was necessary to contact HMRC.  This information was repeated in a number of such successive notices.  The Appellant either did not notice this information or failed to act on it.  HMRC accepts that there has been no lack of good faith, but HMRC submits, and the Tribunal agrees, that this failure to notice and act on this information amounted to a failure by the Appellant to take reasonable care to comply with the PAYE Regulations.
32.	The Tribunal is not wholly unsympathetic to the Appellant’s position.  It has been accepted by HMRC that he duly submitted the P45 on commencement of Mr Cowan’s employment and that through no fault of his own he never received notice of the January 2003 change of tax code.  The Tribunal accepts that his P14s every year gave notice to HMRC of the fact that he was employing Mr Cowan and of the tax code being applied, yet HMRC never informed him that he was applying an erroneous tax code.  Nevertheless, the Tribunal considers that it should have been clear to the Appellant from the notices P9X and P7X that he was not applying the correct tax code and that he needed to contact HMRC.  
33.	In view of the findings above, it follows that the appeal must be dismissed.
34.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

Christopher Staker

TRIBUNAL JUDGE
RELEASE DATE:  29 July 2010