In David A Marshall Jeweller Ltd v HMRC TC01955: an employer's tax scheme using the PAYE regulations failed resulting in a 10% penalty and a tax assessment.

 Mr Marshall, director of his own limited company was paid a £285,000 bonus and £19,740 salary by the company in 2006/07. It did not deduct PAYE, but credited the amounts to the director’s loan account.

The  director had taken part in an income loss scheme. On his self-assessment return he declared the gross employment income but he claimed loss relief  to offset, leaving no tax due on this income.

HMRC assessed the company for PAYE together with penalties for negligence in the failure to operate PAYE correctly.

The company argued that:

  • Because the employee declared the loss on his personal tax return, this would offset any tax deducted by the employer.
  • If the employer were made to deduct PAYE this would effectively create double taxation.
  • In such circumstances under regulation 72F of the PAYE regulations HMRC may direct that an employer is not liable to pay an amount of tax to them.  

The Tribunal looked at regulations 72E and 72F and took a purposive approach; the provisions were not to avoid double taxation, they were brought in to reduce the need for HMRC to make different assessments and collect amounts off different people as might happen when a self-employed worker is categorised as an employee (following the Demibourne decision).

The Tribunal considered whether any amount representing tax on the bonus and salary payments had been self-assessed by being included in the director’s SA return and assessed as payable by way of income tax. 

It agreed with HMRC that there was no self-assessment to any tax due by the individual in the return as submitted (the loss scheme was disclosed under DOTAS and also under HMRC investigation). So the employer was liable for PAYE.

The Tribunal added that if Mr. Marshall was unsuccessful in his claim for losses and so became liable for tax, it may be that the employer could reapply to HMRC on the basis that the conditions in regulation 72E had been met.

The company was also assessed to a 10% penalty. It claimed that it relied on advice from its advisers not to deduct PAYE. The Tribunal found the penalty justified: the director's tax scheme was irrelevant; it was aware that it should have applied PAYE in making the payments.

David A Marshall Jeweller Ltd v HMRC TC01955