[2009] UKFTT 320 (TC)

			
TC00263
		Appeal number SC/3070/2009

PAYE – employer deducting tax at basic rate – liability of employee to under-payments of tax – Income Tax (Employments) Regulations 1993

FIRST-TIER TRIBUNAL

TAX 

	MICHAEL BURTON	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS (Income tax)	Respondents

				TRIBUNAL: 	JUDGE ROGER BERNER

Sitting in public in London on 6 November 2009

Paul Yerbury, Fasken Martineau LLP, for the Appellant

Paul Reading, HM Revenue and Customs Appeals and Reviews Unit, for the Respondents

© CROWN COPYRIGHT 2009

DECISION

1.	The Appellant, Mr M D Burton, appeals against an assessment made pursuant to s 29 of the Taxes Management Act 1970 (“TMA”) in respect of the tax year ended 5 April 2001, and against an amendment to the Appellant’s self-assessment tax return under s 28A TMA in respect of the tax year ended 5 April 2008.  I was informed that the same issue also arises in respect of the tax years 2001/02 and 2003/04 for which no appeals have been made but that payment of tax has been stood over pending the outcome of these appeals.
2.	Briefly, the issue for determination is whether or not the Appellant is liable for income tax on his earnings from his employment with a company, Iris Financial Engineering & Systems (Europe) Limited (“Iris”) to the extent that tax was not deducted under PAYE.
3.	Mr Paul Yerbury of Fasken Martineau LLP appeared for the Appellant.  HMRC were represented by Mr Paul Reading of HMRC’s Appeals and Reviews Unit.
The facts
4.	I had a witness statement of the Appellant who also gave oral evidence on oath and was cross-examined by Mr Reading.  A number of agreed bundles of documents were produced to me.
5.	For reasons which I explain later in this decision I have formed the view that the most material factual question I have to decide is whether the Appellant delivered, or failed to deliver, a form P45 to Iris in respect of his immediately prior employment.  Subject to that question, to which I shall return, on the basis of the evidence before me I find the following facts:
(1)	On 2 February 2001 the Appellant became an employee of Iris with the role of heading the new business sales in Europe.
(2)	Prior to his joining Iris, the Appellant’s former employment had been with Sungard Systems Limited (“Sungard”).  At the end of that employment, according to a payslip for January 2001, the Appellant’s tax code for PAYE purposes being applied by Sungard was 438L, and tax was being deducted at a rate reflecting the higher rate of tax.
(3)	On commencing his employment with Iris the Appellant had not received a P45 from Sungard, and he informed Iris that the form was to follow.
(4)	Iris did not handle PAYE administration in-house, but outsourced this function to the Outsourced Accounting and Payroll division of Grant Thornton UK LLP (“Grant Thornton”).  Financial matters at Iris were dealt with by a combination of Patrick Burdett, who was a principal consultant responsible for delivering client contracts, and Claire MacDonald who was at the time the Appellant joined Iris a receptionist, and who was later promoted to office manager.
(5)	There were a number of deficiencies in the financial administration at Iris.  There were numerous occasions on which salaries were paid late, and letters were received by the Appellant and other Iris employees from Skandia Life, the company’s pension scheme administrator, to the effect that payments of pension contributions had not been made by their due dates, and that accordingly the matter had been referred to the Occupational Pensions Regulatory Authority.
(6)	Although on occasion the salary of the Appellant was paid late, the relevant payslips, which were produced by Grant Thornton, were received by him on time.
(7)	Shortly after the Appellant commenced his employment with Iris, Claire MacDonald wrote by e-mail to Grant Thornton on 9 February 2001 informing them of this fact.  Grant Thornton replied on 12 February 2001 asking for the Appellant’s P45 and saying that if he did not have one a P46 would be sent to Iris and that either the P45 or a P46 would need to be returned to Grant Thornton in time for the monthly payroll.  Claire MacDonald replied on the same day, again by e-mail, informing Grant Thornton that the Appellant was waiting for his P45 to be “returned” by his previous employer, Sungard, and stating that “As soon as I received (sic) it, I will send it on to you.” 
(8)	On 28 February 2001, Grant Thornton wrote to Richard Vaughan (one of the co-founders of Iris) enclosing payroll summary reports for February 2001 and stating that the Appellant had “been taxed at basic rate tax (22%) because he did not provide a P45 or completed P46 in time for this month’s payroll.”
(9)	On 28 September 2001, Grant Thornton wrote to Patrick Burdett at Iris enclosing payroll summary reports for that month.  In that letter Grant Thornton stated:
“Also, please find enclosed P46 forms for completion by [another employee] and Michael Burton.  P46 forms have previously been sent and have not been completed and returned to me.  Can I please have these completed forms by return as both employees are currently underpaying tax.”
A letter from Grant Thornton to Claire MacDonald dated 19 July 2001 had enclosed a blank P46.
(10)	In evidence the Appellant said that he could not recall having been asked by Iris to complete a P46.  However, he accepted that it was possible that Claire MacDonald could have asked him to do so at around the commencement of his employment.  He also said in evidence, and I accept, that he did not himself receive any request from Grant Thornton for a P45 or a completed P46.  I find as a fact that the Appellant did not deliver a competed P46 to Iris.  Further, I find that no P45 or P46 were delivered to Grant Thornton.  I consider later the question whether a P45 was delivered by the Appellant to Iris.
(11)	No blank (i.e. uncompleted) P46 was sent to HMRC (at that time the Inland Revenue) on the first occasion a salary payment was made to the Appellant by Iris.  As HMRC stated in their letter to Iris dated 16 August 2005:
“The instructions on form P46 advise that it should be sent to the Inland Revenue the first time payment is made.  Additionally, the flow chart guidance within the employers guide (Booklet E13) reiterates that even when the P46 is unsigned, the form should be submitted as soon as you pay the employee for the first time.”
(12)	Throughout the Appellant’s employment with Iris his PAYE coding remained at BR (the basic rate coding).  This was the case both for salary and commission, even though on one occasion, when commissions were paid direct from Iris’ head office in the US, the Appellant had taken steps to seek to ensure that tax at the higher rate of 40% would be deducted.  In a letter to the Inland Revenue dated 13 August 2004 Grant Thornton confirmed that basic rate tax was operated as no P45 or P46 was received and that this treatment had been confirmed in numerous calls to the Inland Revenue helpline, despite the fact that the Appellant was a higher rate taxpayer.  The helpline advice was that any tax shortfall would be picked up in the Appellant’s self assessment tax return.
(13)	On 20 October 2003, following the appointment of Robin Phillips as chief executive officer of Iris, Mr Phillips wrote by e-mail to the Appellant to draw his attention to the fact that, on the basis of a form P60, the Appellant had paid tax at only basic rate throughout the tax year 2002/03, and that the higher rate had not, as would have been expected, been applied.  The Appellant says, and I accept, that this was the first occasion on which he became aware of this deficiency.
(14)	The Appellant’s tax returns for each of the years ended 5 April 2001 and 5 April 2002 were received by HMRC on 19 June 2003.  In the supplementary page to the return to 5 April 2001 dealing with employment income, the Appellant recorded only his employment with Iris and his earnings from that employment.  He omitted his earnings from his employment with Sungard.
The law
6.	The principal legislative provision in relation to the making of regulations in relation to PAYE applicable at the material time was contained in s 203 of the Income and Corporation Taxes Act 1988 (“TA”), from which the following are relevant extracts:
“(1) On the making of any payment of, or on account of, any income assessable to income tax under Schedule E, income tax shall, subject to and in accordance with regulations made by the Board under this section, be deducted or repaid by the person making the payment, notwithstanding that when the payment is made no assessment has been made in respect of the income and notwithstanding that the income is in whole or in part income for some year of assessment other than the year during which the payment is made.
(2) The Board shall make regulations with respect to the assessment, charge, collection and recovery of income tax in respect of all income assessable thereto under Schedule E, and those regulations may, in particular, include provision—
 (a) for requiring any person making any payment of, or on account of, any such income, when he makes the payment, to make a deduction or repayment of income tax calculated by reference to tax tables prepared by the Board, and for rendering persons who are required to make any such deduction or repayment accountable to, or, as the case may be, entitled to repayment from, the Board;
 …  
 (c) for the collection and recovery, whether by deduction from any such income paid in any later year or otherwise, of income tax in respect of any such income which has not been deducted or otherwise recovered during the year”
7.	Regulations were made pursuant to s 203, and at the times relevant to these appeals those regulations were contained in the Income Tax (Employments) Regulations 1993 (“the PAYE Regulations”).  I was referred to a number of those regulations, and the following is the text of those I have found material to this decision:
“6—(1) Subject to the conditions specified in paragraph (2), every employer, on making any payment of emoluments to any employee during any year, shall deduct or repay tax in accordance with these Regulations by reference to the appropriate code.
(2) The conditions specified in this paragraph are that—
  (a) a code authorisation in respect of the employee has been issued to the employer by the inspector for that year, and
  (b) the appropriate code is specified in the code authorisation.
(3) The employer shall act in accordance with this regulation and shall deduct or repay tax by reference to the appropriate code, notwithstanding that that code, as determined by the inspector, may be the subject of an objection or appeal.”
“7—(1) The appropriate code shall be determined by the inspector, who for that purpose may have regard to any of the matters specified in paragraph (2).
(2) The matters specified in this paragraph are—
  … 
 (f) such other adjustments as may be necessary to secure that, so far as possible, the tax in respect of the employee's emoluments for the year for which the code is to have effect shall be deducted from the emoluments paid during that year.”
“23—(1) If the employer ceases to employ an employee in respect of whom a code authorisation has been issued to him, or is deemed under these Regulations to have been issued to him, he shall forthwith—
 (a)  prepare a statement on the form provided containing the particulars specified in paragraph (2) and—
(i)    send the statement to the inspector, or
(ii) arrange for the particulars contained in the statement to be transmitted electronically to the inspector; or
 (b) deliver a statement containing the particulars specified in paragraph (2) by an approved means of electronic communications to an official computer system.”
“25—(1) Immediately on commencing his next employment, the employee shall deliver two copies of the statement mentioned in regulation 23(3) to his new employer who, subject to paragraph (8), shall take the action specified in paragraphs (2) to (5).
…
(5) The action specified in this paragraph is that, subject to paragraph (7), the employer shall, on making any payment of emoluments to the employee, deduct or repay tax by reference to the appropriate code in accordance with regulation 14, and keep the records required by paragraphs (3) and (4) of regulation 38, as if the cumulative emoluments and cumulative tax shown on the deductions working sheet prepared in accordance with paragraph (3) above represented emoluments paid to the employee by the new employer and tax deducted by him.”
“28—(1) Subject to paragraphs (4) and (5), if the employer makes any payment of emoluments—
(a) to an employee in respect of whom he has not received a code authorisation from the inspector (and in respect of whom no code authorisation is deemed under regulation 8 to have been issued by the inspector), and that payment is equivalent to emoluments at a rate exceeding the minimum rate specified in paragraph (2), or
 (b) to a new employee with other employment, or to a new employee to whom neither regulation 29 nor 30 applies, at a rate exceeding £1 a week, or £4 a month,
the employer, on the occasion of any such payment, shall, subject to paragraph (3), forthwith take one of the steps specified in paragraph (1A).
(1A) The steps referred to in paragraph (1) are—
 (a) providing the inspector with the particulars mentioned in paragraph (1B) in a document provided by the Board or approved by the Board for that purpose;
 (b) transmitting those particulars electronically to the inspector; or
 (c) delivering those particulars to an official computer system by an approved means of electronic communications.
(1B) The particulars are the name and address of the employee, the employee's national insurance number, the date on which his employment commenced and such other particulars as may be necessary to enable the determination of the appropriate code in accordance with regulation 7.”
“30—(1) This regulation applies to an employee within regulation 28(1)(a), who is not within regulation 29, and who certifies, on a form provided by the Board and delivered to the employer—
   (a) that the employment is his only or main employment, and
   (b) that he is not in receipt of a pension. 
(2) If any payment made as described in regulation 28(1) is the first payment of emoluments made by the employer during the year to an employee to whom this regulation applies, and that payment is equivalent to emoluments at a rate exceeding the minimum rate, the employer, on making the payment, shall deduct tax and keep records on a deductions working sheet which he shall prepare for the purpose as if the payment were one to which regulation 17 applied, applying the code which after allowing for the personal relief specified in section 257(1) of the Taxes Act effects deduction of tax at one or more of the starting rate, the basic rate and the higher rate as the appropriate code.
(3) On making any subsequent payment of emoluments to the employee where paragraph (2) applied to the first payment and where a code authorisation has not been issued in respect of the employee, the employer shall deduct tax as if such subsequent payment were one to which regulation 17 applied, applying the code which after allowing for the personal relief specified in section 257(1) of the Taxes Act effects deduction of tax at one or more of the starting rate, the basic rate and the higher rate as the appropriate code, and shall keep records required by that regulation.”
“31—(1) This regulation applies to an employee within regulation 28(1) who is not within regulation 29 or 30.
(2) Subject to paragraph (3), if any payment made as described in regulation 28(1) is the first payment of emoluments made by the employer during the year to an employee to whom this regulation applies, and the payment is at a rate exceeding £1 a week or £4 a month, the employer, on making the payment, shall, on a deductions working sheet which he shall prepare for the purpose, enter cumulative emoluments and cumulative tax before the first payment as nil and deduct tax in accordance with regulation 14, applying the code which effects deduction of tax at the basic rate as the appropriate code.”
“32- Whenever in accordance with regulation 29, 30, or 31, the employer uses the code which after allowing for the personal relief specified in section 257(1) of the Taxes Act effects deduction of tax at one or more of the starting rate, the basic rate and the higher rate or the code which effects deduction of tax at the basic rate, a code authorisation shall, for the purposes of regulations 6, 8, 13(1), 23(1) and 27(1), be deemed to have been issued to the employer by the inspector specifying whichever of those codes applies as the appropriate code.”
“42—(1) …
(2) If it appears to the collector that the amount specified in regulation 40(2) or 41(2) which the employer is liable to pay to the collector exceeds the amount actually deducted by him from emoluments paid during the relevant income tax period, the collector, on being satisfied by the employer that he took reasonable care to comply with these Regulations and that the failure to deduct the amount which the collector considers should have been but was not deducted (“the excess amount”) was due to an error made in good faith, may direct that the excess amount shall be recovered from the employee, and, where the collector so directs, the employer shall not be liable to pay the excess amount to the collector.”
“101A—(1) For the purpose of determining in respect of the year ended 5th April 1997 or any subsequent year—
  (a) the amount of any such excess as is mentioned in section 59A(1) of the Management Act, or
   (b) the amount of the difference mentioned in section 59B(1) of that Act,
any necessary adjustments in respect of the matters prescribed by paragraph (2) shall be made to the amount of tax deducted at source in accordance with these Regulations in that year.
(2) The matters prescribed are—
(a) the aggregate amount of any repayments of tax deducted at source made to the employee;
 (b) the like matters as are specified in paragraph (4) of regulation 101, having regard to paragraphs (5) and (6) of that regulation.
(3) Where the amount of the difference mentioned in section 59B(1) of the Management Act is payable by the employee as mentioned in that section, the inspector or other officer of the Board may—
 (a) require the employee to pay that amount to the collector, or
  (b) take that amount into account in determining the appropriate code for a subsequent year.
(4) In paragraph (2)(a) the reference to repayments of tax is a reference to any repayments made in the year in which the tax was deducted at source, or after the end of that year but before the employee's return containing his self-assessment is made under section 8 or 8A of the Management Act.”
8.	Section 59B TMA provides for the payment by an individual in respect of his self-assessment for any tax year of the difference between the amount contained in that self-assessment and payments, including PAYE deducted at source, made on account in respect of that tax year.  Subsections (1) and (2) of that section provide:
“59B Payment of income tax and capital gains tax
(1) Subject to subsection (2) below, the difference between—
   (a) the amount of income tax and capital gains tax contained in a person's self-assessment under section 9 of this Act for any year of assessment, and
    (b) the aggregate of any payments on account made by him in respect of that year (whether under section 59A of this Act or otherwise) and any income tax which in respect of that year has been deducted at source,
shall be payable by him or (as the case may be) repayable to him as mentioned in subsection (3) or (4) below but nothing in this subsection shall require the repayment of any income tax treated as deducted or paid by virtue of section 233(1), 246D(1), 249(4), 421(1) or 547(5) of the principal Act or section 626 of ITEPA 2003
(2) The following, namely—
  (a) any amount which, in the year of assessment, is deducted at source under PAYE regulations in respect of a previous year, and
   (b) any amount which, in respect of the year of assessment, is to be deducted at source under that section in a subsequent year, or is a tax credit to which section 231 of that Act applies,
shall be respectively deducted from and added to the aggregate mentioned in subsection (1)(b) above.”
Discussion
9.	Mr Yerbury founded his arguments for the Appellant on three propositions:
(1)	First, that the primary liability to deduct PAYE is on the employer, and not the employee;
(2)	Secondly, that the PAYE Regulations impose statutory duties on the employer and on HMRC, and that in this case Iris, itself and through its agents Grant Thornton, and HMRC were in breach of those statutory duties; and
(3)	Thirdly, that HMRC would normally have proceeded against the employer, and that the real reason they did not do so in this case was because Iris had ceased to trade and recovery of the underpaid tax from Iris was not possible.
10.	In support of his first proposition Mr Yerbury relied upon s 203(1) TA, and he referred me to Demibourne Ltd v Revenue and Customs Commissioners [2005] STC (SCD) 667, and in particular the following passage from the decision of the Special Commissioner (John Clark) at p 678:
“… the regulations are based on the principle that it is the employer, rather than the employee, who is responsible for deducting tax and accounting for it to HMRC, the only exceptions being direct collection and direct payment cases, and directions under reg 42(2) or (3).”
11.	With respect to Mr Yerbury, this does not seem to me to take him very far.  It was not disputed by Mr Reading for HMRC that the principle behind the PAYE regime is that tax is deducted at source by the employer, but this is subject to provisions for direct collection of tax, including under the PAYE Regulations themselves, by virtue of s 203(2)(c) TA.  Mr Reading argued, and I agree, that s 59B TMA makes it clear that, generally, income tax that has not been paid on account or deducted at source under PAYE is payable by the employee.  This is subject to any adjustments required to be made under reg 101A of the PAYE Regulations, which I consider below.
12.	In relation to his second proposition, Mr Yerbury referred me first of all to Bernard & Shaw Ltd v Shaw (Rubin Third Party) [1951] 2 All ER 267 in which, referring to the Income Tax (Employments) Regulations 1950, Lynskey J said (at p 268H):
“In respect of the collection of tax a statutory duty is, therefore, imposed on the employer, and, if he fails to deduct tax, he is in breach of that duty and is liable to pay the tax to the revenue authorities whether he has deducted it or not.”
13.	Mr Yerbury argued that Iris was in breach of its statutory duties under the PAYE Regulations in a number of respects:
(1)	Iris failed to provide its agents, Grant Thornton, with the P45 which the Appellant said he provided to Iris, and also failed to provide a P46, this being in breach of regs 23(1) and 25.
(2)	Iris, through its agent Grant Thornton, failed to  provide the details of the Appellant to HMRC once it was clear that basic rate coding had been employed by default on the Appellant becoming an employee of Iris as required by regs 28 and 31.  This, he argued, included the failure of Iris and Grant Thornton to send an unsigned P46 to HMRC.
(3)	Iris, through its agent Grant Thornton, was negligent in relying upon HMRC’s helpline, and the advice given was in any event, argued Mr Yerbury, incorrect.  On receipt of the advice Grant Thornton ought to have written to HMRC to seek a revised coding for the Appellant. 
14.	Mr Yerbury also argued that HMRC were guilty of breach of statutory duty.  He submitted that HMRC would have become aware of the Appellant’s employment by no later than 20 May 2001 (being 44 days after 5 April 2001) when form P60 would have been filed as required by reg 43.  It would have been clear from this that a BR (basic rate) coding was inappropriate, and HMRC would have become bound in that event to issue the correct coding as required by reg 7.  He argued that similar knowledge would have been available to HMRC when forms P14 were filed in respect of each employee.  HMRC failed to amend the Appellant’s coding for the entire period, and appear only to have become aware of the issue in August 2004.
15.	Mr Yerbury submitted that it is not possible for HMRC to claim under self assessment where there have been serious breaches of statutory duty by the employer, its agent and HMRC which caused the under-deductions to be made, as these are the responsibilities of those parties.  He argued in particular that s 59B TMA and reg 101A cannot apply if there has been such non-compliance with the PAYE Regulations.
16.	It is clear that an employer has a statutory duty to deduct tax in accordance with the relevant PAYE regulations.  Failure to do so will render the employer liable to account for such tax whether or not it has in fact been deducted.  But I do not accept Mr Yerbury’s argument that, absent specific provision to this effect, a breach of statutory duty on the part of the employer, directly or through its agent, or by HMRC, can prevent an assessment on the employee for the amount of an under-deduction.  My Yerbury’s proposition was of a general nature and he did not direct me to anything in the PAYE Regulations that would have the effect of removing from the Appellant his liability to pay tax on his earnings otherwise than to the extent PAYE had been deducted at source.  I will nevertheless consider later the specific case of the alleged failure by Iris to apply the PAYE Regulations in respect of the Appellant’s P45.
17.	As regards the alleged breaches of statutory duty on the part of HMRC, Mr Reading argued that no occasion had arisen under the PAYE Regulations which would have triggered the issue by HMRC of a revised coding in respect of the Appellant.  No P45 or P46 had been received by HMRC.  The Appellant did not submit a tax return for a relevant tax year until 19 June 2003.  The Appellant himself made no contact with HMRC regarding the PAYE position.  Mr Reading argued that HMRC received nothing that would have led them to match the Appellant as employee with Iris as employer.  It was acknowledged that a form P35, an end of year return listing all employees, would have been submitted under reg 43(2).  This shows the total emoluments for each employee but does not indicate the start date or end date for an employment.  For tax year 2000/01, therefore, it could not have been apparent that the Appellant’s earnings were above the higher rate threshold.  In general a new coding would only be issued if it was required by the employer.  Mr Reading accepted that P14s (which set out individually the employee’s details and pay and income, tax and national insurance particulars for the tax year in question) would accompany the P35, but the practice within HMRC was that these were separated from the P35 and a copy sent to the office dealing with NICs.  No other account would be taken of this by HMRC.  The information would not be with the appropriate HMRC team that would deal with the issue of the new coding notices.  That would be done only with regard to forms P45 or P46 as relevant.
18.	 Mr Reading argued that HMRC could not be regarded as having failed to comply with its obligations under the PAYE Regulations by virtue of information being held elsewhere in its records.  He relied upon An Employee v Revenue and Customs Commissioners (SpC 673), Langham v Veltema [2004] STC 544 and Nicholson v Morris 51 TC 95; [1977] STC 162.  Both Langham v Veltema an An Employee were cases on the discovery provisions in s 29 TMA, which are not in issue in this appeal.  Nicholson v Morris concerned fraud or wilful default, the only material point being that it was held in the High Court in that case that the onus was on the appellant to show that the estimated assessments were wrong.  In the course of his judgment in the High Court, Walton J said (at p110):
“… the Taxes Management Act throws upon the taxpayer the onus of showing that the assessments are wrong. It is the taxpayer who knows and the taxpayer who is in a position (or, if not in a position, who certainly should be in a position) to provide the right answer, and chapter and verse for the right answer, and it is idle for any taxpayer to say to the Revenue, "Hidden somewhere in your vaults are the right answers: go thou and dig them out of the vaults." That is not a duty on the Revenue. If it were, it would be a very onerous, very costly and very expensive operation, the costs of which would of course fall entirely on the taxpayers as a body.”
19.	None of these cases is in my judgement determinative of the question whether, having regard to the information available to HMRC, they were in breach of any statutory duty in this case by not issuing a new notice of coding in respect of the Appellant.  As I have explained above, it is my view that even if there had been such a breach of duty it is not something that would operate to eliminate the liability of the Appellant for the under-deduction of tax.  I do not therefore have to answer that question, but if I were required to do so I would follow the logic of the cases I have referred to and say that HMRC’s duty in this respect is to operate within the PAYE Regulations having regard to the matters referred to in reg 7 to the extent that those matters are drawn to the attention of HMRC for the purpose of determining the appropriate code, either by the employer or the employee.  HMRC cannot be expected to have regard to other information within its organisation that has been provided for other purposes.
20.	Mr Yerbury’s final proposition was that HMRC was not following its normal practice of recovering an under-deduction of tax from the employer only because Iris had now ceased to carry on business and had no assets.  He referred me to a letter from HMRC to Stringer Saul (now Fasken Martineau LLP) dated 4 November 2004 in which it was indicated that consideration would be given to making a direction under reg 42(2) to relieve Iris of its liabilities as employer in respect of apparent under-deductions of tax, with the result that such liabilities would be recoverable from the Appellant.  No such direction had been made, and yet HMRC continued to pursue the Appellant and not Iris.  Mr Yerbury argued that it was not appropriate for HMRC to claim against an employee merely because the employer has no assets with which to satisfy the PAYE obligations.
21.	Mr Reading refuted the suggestion that the assets position of Iris had anything to do with the decision to assess the Appellant.  No direction had been made under reg 42(2) because HMRC had satisfied itself that there had been no under-deduction by Iris.  In a case where no P45 or P46 had been supplied the applicable regulation is reg 31 under which the application of code BR (the code which effects deduction of tax at the basic rate) is appropriate.  Reg 32 then provides that this code is deemed to have been issued to the employer by HMRC.
22.	I do not accept Mr Yerbury’s argument.  If an employee has a liability for an under-deduction of tax, this will not be affected by the fact, if it be the case, that the employer also has such a liability, and HMRC chooses, for whatever reason, not to seek recovery from the employer.  For reasons which will become apparent later, I think this would be a rather unusual situation, but it is the situation that Mr Yerbury argued applies here, namely that the employer has made an under-deduction of tax and is liable, and the employee is also liable and ought to be relieved of that liability by virtue of HMRC choosing not to pursue the employer because it has no assets out of which recovery might be made.  Even if it were correct (which I do not decide) that this was indeed the reason why HMRC did not proceed against Iris, it could not in my view affect any liability of the Appellant in respect of the under-deduction of tax.
The P45 question
23.	For the reasons given above, I find that this appeal cannot succeed on any of the arguments presented by Mr Yerbury.  In particular I do not agree with him that s 59B TMA and reg 101A of the PAYE Regulations do not apply.  However, that does not quite conclude this matter, because if reg 101A does apply it seems to me that I must consider the possible effect of its application to the facts of this case.
24.	Although both parties referred me to reg 101A in general terms, there was no exploration before me of its possible application to the different factual analyses presented.  In particular, although reg 101A refers to the need for adjustments to be made in respect of certain prescribed matters by reference to reg 101(4), no specific argument was addressed to me on that regulation.
25.	The terms of reg 101A are referred to above, and I need not repeat them in full here.  Where, as in this case, s 59B(1) TMA applies, the effect of reg 101A is to require there to be certain adjustments to the amount of tax deducted at source, which is an element of the calculation of the over-, or as here under-payment of tax, described in s 59B as “the difference”.  The matters prescribed in relation to these adjustments include “the like matters as are specified in paragraph (4) of regulation 101, having regard to paragraphs (5) and (6) of that regulation.
26.	The material parts of reg 101 are as follows:
“101—(1) If the tax payable under the assessment is less than the total net tax deducted from the employee's emoluments during the year less any subsequent repayments made, the inspector may, and if the person assessed so requires shall, repay the difference to the person assessed instead of taking it into account in determining the appropriate code for a subsequent year.
(2) If the tax payable under the assessment exceeds the total net tax deducted from the employee's emoluments during the year less any subsequent repayments made, the inspector may require the person assessed to pay the excess to the collector instead of taking it into account in determining the appropriate code for a subsequent year, and where the inspector so requires the person assessed shall pay the excess accordingly.
…
 (4) The matters specified in this paragraph are—
   (a) any tax which the employer was liable to deduct from the employee's emoluments but failed so to deduct 
…
 (5) An adjustment under sub-paragraph (a) or (b) of paragraph (4) shall be disregarded for the purposes of determining the amount of the difference mentioned in paragraph (1) and of computing any tax overpaid under sub-paragraph (c) of paragraph (4).
(6) Where a direction is made by the collector under regulation 42(2), or by the Board under regulation 42(3) or 49(5), in relation to the employee and in respect of one or more income tax periods falling within the year—
(a) the employee shall not be entitled to include the amount of tax which is the subject of the direction in calculating the amount of tax referred to in paragraph (4)(a);
(b) if the direction follows the making of the assessment, the amount (if any) shown in the notice of assessment as a deduction from, or a credit against, the tax payable under the assessment shall be taken as reduced by the amount of tax which is the subject of the direction.”
27.	The effect of reg 101A therefore, in calculating the underpayment of tax by the Appellant, is to require there to be an adjustment to the total net tax deducted in respect of tax which Iris was liable to deduct from the Appellant’s earnings but failed so to deduct (reg 101(4)(a)).  This means that the total net tax deducted must be deemed to be increased by the amount of tax that has failed to be deducted to the extent that Iris was liable to deduct that tax.  If this applies in the case of the Appellant, the effect would be that the total tax deducted would be increased to the amount deductible at the higher rate, and on the basis this case has been put this would determine the appeal in his favour.  Regulation 101(4) is subject to paras (5) and (6) of reg 101, but in neither case would this alter the analysis.  As regards reg 101(5) this requires an adjustment of the nature I have described to be ignored for the purpose of reg 101(1).  Regulation 101(1) is concerned with over-payments of tax, so the purpose there is evidently to preclude an increase in the amount repayable to an employee where there has been no actual deduction by the employer, even where the employer was liable to make the deduction.  It does not apply to reg 101(2), which concerns under-payments, and so cannot restrict the operation of reg 101(4) in this case.  Nor can reg 101(6) apply, because no directions have been made under any of the regulations to which that provision applies.
28.	The question then is whether Iris was indeed liable to deduct tax at the higher rate from the Appellant’s earnings, which it failed to do.  There is no dispute that Iris was liable to make deductions in accordance with the PAYE regulations: see reg 6(1) and reg 14.  The extent and nature of that liability depend on the particular circumstances.  If a P45 is delivered by the employee to his new employer, reg 25(5) requires the employer to deduct tax in accordance with the appropriate code.  If the employee for whom there is no code authorisation (because no P45 has been delivered) makes the appropriate certification on a P46 delivered to his new employer, under reg 30(2) the employer is required to deduct tax at one or more of the starting rate, the basic rate and the higher rate as the appropriate code.  Finally, reg 31 provides that if reg 30 does not apply (in other words, generally, where neither a P45 nor a completed P46 have been delivered) the employer is liable to effect deduction at the basic rate only.
29.	I have found that the Appellant did not deliver to Iris a completed P46.  Regulation 30 cannot therefore apply.  The issue remains whether, as the Appellant says, he did deliver a P45 to Iris, although it was never acted upon as it was not received by Grant Thornton, so that reg 25(5) applies and Iris has failed to deduct tax which it was liable to deduct, or, as HMRC argue, the Appellant did not deliver his P45 to Iris at all, so that reg 31 applies, and Iris has fully satisfied its liability to deduct tax at the basic rate.  This is a question of fact to which I must now turn.
30.	In his witness statement the Appellant says the following:
“Soon after joining Iris, Claire MacDonald who was the receptionist at Iris asked me for my P45.  I distinctly remember having to ask my former employer for this, as I had not long left Sungard, but when it did come through I gave it to Claire and assumed that the correct calculations would be made, as had always been my experience working as an employee in previous employments.”
31.	The e-mail from Claire MacDonald to Grant Thornton on 12 February 2001 confirms that the P45 was awaited, but there is no documentary evidence that shows that it was received by Iris.  The next reference to the P45 is found in an e-mail from Claire MacDonald to Grant Thornton dated 28 November 2003 as follows:
“Did you ever receive a P-45 from Mike Burton?
Please would it be possible for you to send over a copy a she (sic) has requested it?”
The typing error in this e-mail caused some confusion, it being assumed by the parties that it should read “as she”.  I put it to the Appellant that a more natural reading would be “as he”, referring to the Appellant, but he told me that he could not recall asking for his P45 in this way.
32.	It is clear to me, and I so find, that the financial administration at Iris was less than satisfactory.  Salary payments were made late and pension contributions were delayed.  I have seen evidence, from letters written by Grant Thornton to Iris, of delays or defaults in filing or producing required PAYE information, namely form P35 and forms P46 for both the Appellant and another employee.  An e-mail from Grant Thornton to Iris of 11 May 2003 notes that a payment to the Inland Revenue was late and accruing interest since 19 April 2003.
33.	The burden of proof as to delivery of the P45 is on the Appellant.  The only evidence before me that a P45 was delivered by him to Iris is his own testimony.  There is no other evidence that a P45 was ever in the hands of Iris, or of Grant Thornton.  None of the requests made by Grant Thornton to Iris in respect of the Appellant’s P45 elicited any response from Iris to suggest that the P45 had been received, but had been mislaid.  For a P45 to have existed it would have to have been provided by Sungard, the Appellant’s former employer.  In doing so Sungard would have been under its own obligation, under reg 23(1) of the PAYE Regulations, to send Part 1 of the form P45 direct to HMRC.  If that had been done there would have been evidence of the existence of the P45 which would have provided some support for the Appellant’s assertion.  However, there is none.  Nor is there any evidence that the Appellant retained the employee copy of the P45; indeed the fact that information relative to the Sungard employment was omitted from the Appellant’s tax return for 2000/01, suggests that he did not have the information that would have been available from that copy.
34.	I should emphasise that I did not form the view that the Appellant was seeking to mislead the Tribunal, and I have taken into account the fact that his assertion in respect of his P45 was made at a time when I believe neither he nor his advisers had fully appreciated the full significance of the issue.  However, the Appellant’s recollection was in some respects a little hazy, going back as it was to events of 2001 to 2003, when he was facing difficult personal circumstances, and he could not for example recall having asked for his P45 in November 2003.  The e-mail from Claire MacDonald to Grant Thornton of 28 November 2003 suggests to me that, despite his lack of recall, the Appellant did ask for his P45 at that time, but the fact that Claire MacDonald herself then asked Grant Thornton if they had received the P45 from the Appellant himself indicates that she had no recollection of herself having received that form from the Appellant.
35.	If the Appellant were right, and he did deliver his P45 to Iris, the absence of any evidence of it, and its various copies, could only be explained by a combination of Iris’ mismanagement, which for the reasons I have given I regard as plausible, in failing to deal with the P45 at all, the failure by Sungard, despite having completed the P45 and sent it to the Appellant, to send Part 1 of that form to HMRC and the failure by the Appellant to retain, even for the purpose of completing the relevant tax return, his part of the form.  In the absence of any evidence, apart from the Appellant’s own assertion of that fact, as to the existence of the P45, I am unable to conclude that the Appellant has discharged the burden of proof that he did deliver a P45 to Iris, and I find on the balance of probabilities that he did not do so.
36.	The consequence of this finding is that reg 25(5) did not apply.  Nor, as I have found, did reg 30.  Regulation 31 is therefore applicable, under which the liability of the employer is to deduct tax at the basic rate.  Iris did deduct tax at the basic rate and so there was no failure on the part of Iris to deduct tax in accordance with the PAYE Regulations.  Therefore no adjustment to the total net tax deducted is required under reg 101A or reg 101(4)(a) and consequently no deemed increase in the total net tax deducted.  The Appellant is liable for the under-payments of tax.
Decision
37.	For all these reasons, I dismiss these appeals.
The Appellant has a right to apply for permission to appeal against this decision pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.  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. 

ROGER BERNER
TRIBUNAL JUDGE
RELEASE DATE: 18 November 2009