In D.A. Gray v HMRC [2017] TC05754 the FTT blocked a discovery assessment in relation to a termination payment. The taxpayer was not negligent in failing to notify HMRC as although the employer had only deducted basic rate tax, that was what the PAYE regs' demanded.

  • The taxpayer’s employment with ITV ended in 2007/08 and he received a large termination payment in early 2008/09, his employer deducted basic rate tax as it was required to at that time.
  • The taxpayer did not notify HMRC of his higher rate tax liability.
  • HMRC raised a discovery assessment for 2008/09 in December 2013. The taxpayers accountants complained that this was the wrong year.
  • In August 2015 HMRC annulled the 2008/09 assessment and issued one for 2007/08.
  • The taxpayer appealed on the basis that HMRC was now out of time to raise an assessment.

Noting that it ‘found the statutory provisions in this appeal quite complicated’, due to the combination of the PAYE regulations and subequent changes to assessment time limits, the FTT found that HMRC could go back 20 years if:

  1. the taxpayer had been negligent and 
  2. the loss was brought about deliberately, or was attributable to a failure to comply with section 7 TMA 1970 (notification of liability to income tax).

In considering s7, there was no failure if the relevant income had been taken into account in the making of deductions or repayments tax under PAYE regulations.

The FTT decided that the employer had operated PAYE correctly and quashed the assessment.


This is condensed version of the facts and the decision. A good case for tax geeks: there were also questions over which was the relevant year to assess. The fact that such confusion existed and that even the tribunal found the rules complicated demonstrates the toxic tax cocktails that can be mixed when secondary legislation is used to manipuluate primary legislation. Expect Making Tax Digital to be as bad, if not worse.

Following changes to the PAYE regs' employers will now need to deduct PAYE on a OT w1/m1 basis on a leaving payment made post P45. Note also new rules on termination payments from April 2018.


D.A. Gray v HMRC [2017] TC05754

Useful guides

Termination and Redundancy Payments

Discovery Assesmements and time limits