[2011] UKFTT 164 (TC)

TC01033
				                         
  Appeal reference: TC/2010/03141

INCOME TAX – PAYE – whether direction notice given to Appellant under reg. 72(5) Income Tax (Pay As You Earn) Regulations 2003 requiring him to pay tax which employer failed to deduct and pay should be set aside – no – on facts employer’s failure to deduct genuine mistake – appeal dismissed
	
FIRST-TIER TRIBUNAL
TAX CHAMBER

 
 	
					THOMAS JAMES BLANCHE	Appellant

- and -

THE COMMISSIONERS FOR
				HER MAJESTY’S REVENUE AND CUSTOMS	Respondents

Tribunal: David Demack (Judge)
		Susan Stott FCA (Member)

Sitting in public in Manchester on 21 February 2011

The Appellant in person

Mr. B Morgan, an officer of the Commissioners, for the Respondents

© CROWN COPYRIGHT 2011
DECISION

1.	This is an appeal by Mr Thomas James Blanche against a direction notice given by the Commissioners under regulation 72 (5) of the Income Tax (Pay As You Earn) Regulations 2003 (“the Regulations”) relieving his employer, Driven Solutions Ltd (“Driven”), a franchisee of DriverHire Nationwide, for incorrect deductions of tax from his earnings, thus placing the liability to pay tax in question on Mr Blanche.
2.	The legislation we must consider in dealing with the appeal is to be found in regulations 72 and 72B of the Regulations and, for convenience, we now set out the relevant parts thereof:
72. Recovery from employee of tax not deducted by employer

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 – 

“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. …

5. The Inland Revenue may direct that the employer is not liable to pay the excess to the Inland Revenue

72B. Employee’s appeal against a direction notice where condition A is met
1.	An employee may appeal against a direction notice under regulation 72(5A)(a) – 
a)	by notice to the Inland Revenue
b)	within 30 days of the issue of the direction notice,
c)	specifying the grounds of the appeal
2.	For the purpose of paragraph (1) the grounds of appeal are that – 
	a) the employer did not take reasonable care, or
	b) the excess is incorrect
3. On an appeal under paragraph (1) [that is notified to the tribunal, the tribunal] may – 
a) if it appears … that the direction notice should not have been made, set aside the direction notice 
3.	The background facts to the appeal are not in dispute, and we shall now rehearse them.
4.	Mr Blanche is retired and in receipt of a pension from Lloyds TSB Bank Plc, and his personal tax allowance is set against his income from that source. From July 2000 he was registered as an agency driver by Driven. His income from that source all being liable to tax at the standard rate, Driven was notified of a tax code of BR (basic rate). 
5.	The company correctly deducted tax from his income until he left its employ in September 2005. Mr Blanche then took up other employment, but returned to Driven in January 2006. On returning he presented Driven with a Form P45 from his previous employer, showing a tax code of 489. What happened after presentation is unclear; suffice it to say that Driven did not immediately act on the Form P45 but did so from a date in April 2006. By then the allowances for tax year 2006-07 had come into force so that acting in accordance with the 2006 budget requirements, Driven deducted tax on Mr Blanche’s income using tax code 503L.
6.	On 10th May 2006 the Commissioners issued Mr Blanche with a new notice of coding BR.  Both he and Driven received that notice, but he claimed to have failed to notice that Driven continued to deduct tax on the basis of code 503L. It so continued throughout the tax year 2006-07, and indeed carried forward the error updated in accordance with budget requirements throughout the tax year 2007-08.
7.	When the error came to the attention of the Commissioners they investigated the situation and initially decided that Driven should repay the under deduction of tax. However the company made further representations to the Commissioners. In a letter of 18th February 2009 Mr Holt of Driven explained that the company’s software provider was SAGE.  He continued:
“Within SAGE Payroll, I have access to the IR Secure Mailbox Log.  The log, copy attached, shows that no communication was received from HMRC on 10th May 2006.  However, there was a communication dated 21st May 2006 which could possibly have been the coding to which you refer. The Employers Helpline couldn’t confirm this for me.
The Log shows that we actioned the coding sent to us on 25th May 2006.  The statement ‘Success’ shows that the coding was successfully taken from the IR Mailbox and applied electronically into the employee’s record within the payroll software.  SAGE will have confirmed to Steve that the new coding had been successfully applied on the PC screen for the employee.
However, when I look at the audit trail for the payroll software, there isn’t a record of the recoding being inputted into the employee record from the IR Mailbox.
With 2 pieces of conflicting information, the IR Secure Mailbox log telling me that the coding had been successfully applied, and the payroll audit trail telling me that it hadn’t, I contacted the SAGE helpline for further assistance.
I can’t confirm for certain, but the problem may have been associated with another piece of software which is provided by our Franchisor as part of the invoicing and payroll function.  This software may have over written the initial recoding in SAGE, if it wasn’t updated as the same time.  This would, I’m told, explain why there is no record on the SAGE Audit Trail of the recoding, even though the IR Mailbox says that it was correctly applied.
In May 2006 receiving electronic codings was fairly new to us, and having received a message from the PC saying the recording had been successfully applied, Steve may not have updated the Driver Hire software.
I have reconfirmed today that the current operatives for payroll are fully aware of the need to update both pieces of software at the same time as there is a recoding notice received from HMRC.  I am also talking to the IT Director at our franchisor to ask them to review their software, and to question the validity of it being able to overwrite direct inputs into SAGE from HMRC.”
8.	The Commissioners accepted that the system of electronic code numbers was new to the company, and its systems showed that the revised code had been input successfully on to its SAGE computer system.  They also observed that there appeared to be a newly installed secondary system to run alongside the SAGE system and that unless the revised code was also input on to that system the latter overrode the SAGE system coding, and re-instated the 503L code.
9.	Driven provided further information by letter of July 2009, accompanying it with an email from a director of Driven’s franchisor. In the email, the director referred to possible problems with the computer systems and said that “in his opinion, this does look like a genuine mistake has happened”. In the letter, Mr Holt set out information he had obtained from SAGE and Driven’s franchisor. He referred to the Drive Hire IT system, known as dhOps (Driver Operating System), and to an email in which the franchisor explained how they had integrated several systems to avoid the necessity of duplicating the input of the same data. Having recorded that all members of Driven’s staff had attended the training on the dhOps system and achieved the necessary level of proficiency in its use, Mr Holt offered the following explanation of how the company’s software was used:
	“
•	dhOps holds the customer and candidate (agency worker) details as two databases.
•	Client bookings are entered on to the system, and candidates are linked to the booking.
•	The following week after a booking has been completed, dhOps is used to produce the invoicing for the client and the payroll for the candidate.  Timesheet information from the candidate is entered once onto the dhOps system, and a file is exported to our franchisor.
•	Our franchisor returns two files back to us.  The first contains invoicing details.  The second file contains payroll details in the form of hours and hourly pay rates worked the previous week which payment is required for, and particularly relevant, the personnel details, i.e. name, address, NI number, tax code, W1M1, and bank account details for BACS payment.  The payroll details sent in the file are a ‘snap shot’ of the information held on the system at the point when the payroll files are sent.
•	This second file is processed through linking software, so that SAGE software in the office is automatically pre-populated with all of the candidates payroll details, i.e. how many hours worked and pay rates to make correct and accurate payment without having to re-enter the same details for a second time from the timesheets.  Relevant to this case, is the fact that personnel details within the file from the franchisor will over ride any existing data held on the candidate within the SAGE software.  This is confirmed in Alan’s email in paragraph 4.  This is actually a very useful function for a new candidate, as the data is used to automatically set up a new employee within SAGE without a member of staff in the office having to set a new starter up manually.
•	The rest of the payroll function is then processed ‘normally’ using SAGE.
In the case in question, Steve Weatherald received the HMRC recoding instruction from HMRC via the HMRC Mailbox function in SAGE.  He correctly processed the recording in SAGE, and you have confirmation of this from my previous letter with the word ‘Success’ against the recoding instruction.  At this stage dhOps should have been updated as well but I believe that it wasn’t.  As a result, when payroll subsequently ran the following week, the existing ‘snap shot’ personnel details came through the franchisor payroll files to us, and over wrote the correct information in SAGE.”
Having analysed the information provided, the Commissioners wrote to Driven on 4 September 2009 saying:
“From the explanation given it appears that the Driver Hire Operating System software (dhOps) functioned as intended.  Alan Fairclough’s e-mail states that dhOps was designed to be the ‘master’ system which updated any additional systems it connected to e.g. the SAGE payroll system.  This is why the amended tax code on the SAGE payroll system was overwritten by dhOps.  As such it appears that the failure to operate the new tax code was due to the fact that the new code was not entered on to the dhOps system, rather than through some software error.”
10.	Mr Holt provided yet more information to the Commissioners on 23 September 2009 making particular reference to two screen shots, one of which was, dhOps user manual ‘payroll tab’. In the first paragraph of that shot under the screen image it stated (5) “Details added into dhOps will overwrite any details held in the SAGE payroll system”.  Mr Holt added “There isn’t a reference to the specific handling of HMRC tax codings which are received electronically into SAGE Payroll, and then need to be moved manually into dhOps, so that at the next run of payroll dhOps can update SAGE payroll electronically”.
11.	On 6th November 2009 the Commissioners  wrote to Driven informing it that they had decided not to make a direction under regulation 72 (5) of the Regulations.
12.	However on 29th January 2010, having reviewed the situation, the Commissioners withdrew the refusal notice of 6 November 2009 and issued a direction notice relieving Driven of the liability to the tax of £2783.95 on Mr Blanche’s income that had not been paid. They also said:
“We are satisfied that you took reasonable care to deduct the correct amount of tax from the relevant payments you made but, due to an error made in good faith, deducted too little.  Accordingly, the employee is liable to pay the difference between the amount of tax you deducted from those payments and the amount of tax that you ought to have deducted.”
The Commissioners particularly took into account Driven’s otherwise unblemished record in dealing with tax matters, both pre and post events concerning Mr. Blanche.
13.	The Commissioners then sought the tax in question from Mr Blanche and he appealed their decision on the basis that Driven did not take reasonable care to operate PAYE.
14.	Mr Blanche invited us to overturn the Commissioners’ decision claiming that Driven had failed to take reasonable care in dealing with his liability to PAYE. He placed particular emphasis on the screen shot to which he referred in para [10 ] above, observing that it was plain that therefrom Driven had been informed in terms that details from the dhOps system would overwrite any information held on the SAGE payroll system. In remainder, he essentially relied on the reasons given by the Commissioners for their decisions they made prior to the decision on review.
15.	Mr Blanche accepted that every one of the payslips issued to him by Driven during the two tax years concerned displayed the incorrect code, but claimed to have checked none of them, relying on his wife for the purpose.
16.	We have most carefully considered all the factual evidence placed before us, and the factors that the Commissioners have taken into account at all the various stages of this matter.  There is no doubt in our minds that throughout Driven acted in good faith and in the particular circumstances of the case, we have concluded that the Commissioners’ decision on review is the correct one.
17.	We therefore dismiss the appeal, and refuse to set aside the direction notice.  
18.	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.

DAVID DEMACK
TRIBUNAL JUDGE
Release Date: 8 March 2011