PAYE coding errors: carte blanche for employers?

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09 May 2011

In Thomas James Blanche v HMRC (21 February 2011), the First-Tier Tribunal upheld HMRC's decision to relieve an employer of liability for tax which it had incorrectly failed to deduct from an employee's earnings, and instead to impose liability for the shortfall on the employee.  Does this case signal a lenient approach to employers who make errors in calculating PAYE?


Mr Blanche was registered as an agency driver with Driven Solutions Limited (the "employer") between 2000 and 2005, during which time the employer deducted tax from his income at the correct rate.  Mr Blanche then took up other employment, but returned to the employer in January 2006.  From April 2006, the employer deducted tax from his income using tax code 503L.  In May 2006, HMRC issued Mr Blanche with a new notice of coding BR, and this notice was also received by the employer.  However, the employer continued to deduct tax on the basis of code 503L throughout the remainder of the tax year 2006-07, and throughout the whole of the tax year 2007-08.  Mr Blanche claimed that he failed to notice the error.

HMRC subsequently investigated the situation, and initially decided that the employer should repay the under-deduction of tax.  However, following further representations, this decision was reversed on review.  The cause of the error was apparently a failure relating to the interaction between the two computer systems operating the employer's payroll system, which were relatively new to the employer at the time the coding notice was received.  It appears that the coding notice was successfully processed on one of the two systems, but (probably through human error) it was not updated on the second system, which then overrode the update made to the first system.

In relieving the employer of liability for the additional tax, HMRC stated it was satisfied that the employer had taken reasonable care to deduct the correct amount of tax from the payments to Mr Blanche, and that the error in deducting too little had been made in good faith.  HMRC took into account in particular the employer's otherwise unblemished record in dealing with tax matters both before and since the events concerning Mr Blanche.  

Accordingly, Mr Blanche was liable to pay the shortfall.  He appealed on the basis that the employer had not taken reasonable care in operating PAYE.


The First Tier Tribunal, having reviewed all the evidence, stated they had no doubt that the employer had acted in good faith throughout, and concluded that HMRC's decision on review was correct in all the circumstances of the case.


The legislation which was under consideration in the appeal is contained in regulation 72 of the Income Tax (Pay As You Earn) Regulations 2003 (the "2003 Regulations").  This provides that where the deductible amount under PAYE exceeds the amount actually deducted by an employer, the Revenue may direct that the employer is not liable to pay the excess to the Revenue, provided that the employer took reasonable care to comply with the 2003 Regulations, and that the failure to deduct the excess was due to an error made in good faith.

The approach taken by HMRC in this case, and the approval of that approach by the Tribunal, suggests a perhaps surprisingly generous treatment of employers making miscalculations as a result of human error.  However, implicit in the Tribunal's judgment was a lack of sympathy towards Mr Blanche's contention that he had not checked the coding on any of his payslips, apparently relying on his wife to do so.  This, together with the emphasis placed by HMRC on the fact that the employer's record on tax matters was "otherwise unblemished", indicates that the case probably does not open the way to a more broadly lenient approach.

Employers will need to remain vigilant to ensure that they are taking reasonable care in implementing PAYE in order to comply with the 2003 Regulations.  At the same time, employees would be well advised to check their payslips carefully each month in order to avoid the possibility of unexpected tax bills at a later date.

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