Over recent years HMRC's use of PAYE data has been substantially modernised and has led to HMRC pursuing PAYE debt much more rigorously. This has thrown the relevant law into the spotlight.
It is well established that it is the employer's obligation to operate PAYE correctly. Where there has been an under-deduction of tax, the employer could 'negotiate' with the employee to adjust future pay to rectify the position.
Of course, an error is not often found that quickly, so what does the law allow? Reg 80 Income Tax (PAYE) Regulations 2003 allows HMRC to pursue the employer for unpaid tax. If the employer does not pay HMRC within 30 days, Reg 81 then allows the employee to be pursued if the employee received the payments knowing that the employer had wilfully failed to deduct the tax. For most 'normal' employees, it is highly unlikely that they would 'know' that the employer had 'wilfully' not done so, so Reg 81 is often irrelevant.
Reg 72 may also apply to under-deductions in two situations. The first is similar to the above i.e. knowing and wilfully. However, the second condition allows HMRC to pursue the employee where:
'...the employer satisfies the Inland Revenue that the employer took reasonable care to comply with these (PAYE) Regulations and that the error to deduct the excess was due to an error made in good faith.'
It therefore follows that a failure to operate PAYE correctly by the employer e.g. not asking for a P45 or P46 or arbitrarily using the wrong code, can never be the employees' problem. It also means that without knowing the answer as to why the employer made an error, the employee should never be pursued.
So why does HMRC's policy seem to be to chase the employee in this situation? Not because it is easier to twist the arm of a possibly unrepresented individual, surely?
Self-assessment also doesn't help understand the situation. Fill out the return and it will also show an underpayment. However, if the fault is that of the employer, a notional credit should be claimed for the tax which relates to the employer's error i.e. no underpayment! A wonderful piece of tax alchemy!
It is about time that HMRC started playing by the rules instead of trying it on!