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The myriad of rules relating to the recovery and enforceability of income tax, National Insurance and PAYE are lengthy, complex and substantively different.
The Office for Tax Simplification has previously reported on the ‘creaking links’ between income tax and national insurance, despite the seemingly comparable base.
When dealing with the recovery and enforceability of income tax, national insurance and PAYE, taxpayers and advisers must be prudent to identify what HMRC is specifically seeking to recover and enforce, alongside assessing whether HMRC is doing so legitimately.
Income Tax and PAYE
The Taxes Management Act 1970 provides a legislative basis for the management and collection of tax by HMRC.
The Taxes Management Act 1970, s 34 limits HMRC’s ability to assess a taxpayer’s liability to 4 years from the end of the relevant tax year where there is a discovery. However, Taxes Management Act 1970, s 36 extends this to:
Beyond these time limits, HMRC does not have any authority to assess and determine a tax liability.
The Limitation Act 1980 s 37 (2)(a) expressly excludes any applicable time limit in relation to the recovery of debt relating to taxes or duties. Therefore, where HMRC has legitimately assessed that tax is due, HMRC may enforce this debt indefinitely. However, as a matter of policy, HMRC do not seek to recover a tax debt that occurred beyond 20 years.
PAYE is a method of collecting income tax on employment related income and benefits. The Income Tax (Pay As You Earn) Regulations 2003 require an employer to deduct income tax from an employee’s earnings from employment.
Where an employer fails to deduct the correct amount of tax, HMRC may determine that the employer must pay any tax outstanding (Reg. 80). Where the tax payable is unpaid after 30 days, HMRC may transfer the liability from the employer, to the employee (Reg. 81). Similarly, HMRC may recover unpaid tax from the employee where the employee received the earnings from the employer and the employee knew that the employer wilfully failed to deduct tax (Reg. 72).
The PAYE Regulations do not prescribe a time limit for the recovery of tax, unless it is recovered through summary proceedings (Reg. 84). However, Reg. 80(5) does specify that the general rules applicable to the collection of tax, highlighted above, similarly apply to PAYE.
The Government has proposed to introduce new measures in Finance Bill 2020, that will enable the transfer of a company’s tax liabilities to a director, shadow director and certain others, which is referred to as a Joint Liability Notice (JLN).
Under the proposed new measures, HMRC will have the power to issue a JLN, in relevant circumstances where:
This will add a further opportunity for HMRC to recover unpaid tax from additional persons, in effect opening the doorway for direct claims against directors for unpaid PAYE (alongside other taxes).
National Insurance Contributions
The principal liability for both primary (employee) and secondary (employer) NIC is the employer’s liability. Where the employer does not recover primary NIC, no further Class 1 primary liability will arise as ‘earnings’. However, instead HMRC will treat this as a benefit for Income Tax purposes and create a Class 1A liability, on the employer.
NIC is separate from PAYE, however Class 1 NIC should be paid, accounted for and recovered in a similar manner to PAYE (Regulation 67(1) 2001/2004 Social Security (Contributions) Regulations 2001).
There is no statutory authority prescribing a time limit for the recovery of NIC. Alongside this, HMRC commonly accepts that NIC falls outside of the ‘Taxes and Duties’ exclusion within Limitation Act 1980 s 37 (2)(a).
Therefore, the recovery of National Insurance is treated as a civil debt. Resultingly, the normal limitation period of 6 years applies to National Insurance, from the date that the liability arises (Limitation Act 1980 s 9).
The date that the liability arises is generally clear, this is the date that the NIC is payable. However, where there has been fraud or concealment, the 6 years will start from the point of discovering the fraud or concealment.
Where HMRC is in time to enforce an NIC debt, HMRC have the option to transfer the debt from the company to the company directors, where there is negligence or fraud (Section 121B Social Security Act 1998).
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