Bulley (Officer of the Commissioners for HM Revenue & Customs) v Hemmer Investments Ltd & Anor

Under the PAYE Regulations, an employer’s monthly liability is determined by tax which it was liable to deduct and repay. The calculation is not confined to sums actually paid during the relevant tax period. By contrast, the annual return requires the employer to state total net tax actually deducted, less tax actually repaid to employees.

An employer cannot reduce the annual PAYE figure by rebates recorded in its payroll but never paid to employees, unless a binding net-pay or free-of-tax agreement authorises that treatment. A liability arising from an incorrect annual return may be enforced as a civil debt and need not arise through a determination under regulation 80.

HMRC claimed PAYE income tax and interest from a scaffolding company whose employees worked offshore in four-week rotations. During unpaid leave periods, the payroll recorded tax rebates for the employees, but the rebates were not paid. The company deducted those recorded rebates from its annual PAYE returns.

The company argued that the employees were engaged on net-pay terms, so that tax credits and debits were for the company’s account. It also raised procedural objections concerning the absence of a regulation 79 certificate and the applicable limitation period. The central issues were whether the company could deduct the unpaid rebates and whether HMRC had brought the claim by the proper procedure.

The claim succeeded. Judgment was entered for HMRC for the sums claimed, together with interest.

1. Monthly PAYE liability. Regulation 68 of the Income Tax (Pay as You Earn) Regulations 2003 determines the amount payable for a tax period by reference to tax which the employer was liable to deduct and tax which it was liable to repay. Liability, rather than payment in fact, is the relevant test. HMRC therefore correctly reduced the regulation 80 determinations to nil because the company had paid the regulation 68 amount.
2. Annual return. Regulation 73 requires the employer’s annual return to state total net tax deducted. The definition of that expression refers to tax actually deducted less tax actually repaid to the employee. The company was not entitled to subtract rebates which appeared in its payroll but had not been paid.
3. Source of liability and procedure. Regulation 73, read with the prescribed P35 form and regulation 76, recognised the obligation to pay the proper total net tax. The liability in this case did not arise under regulation 68 and therefore was not a regulation 80 determination requiring an appeal to the tax tribunal. It was a debt recoverable in the civil courts.
4. Certificate and limitation objections. The documents issued on 2 January 2008 were not regulation 79 certificates. Nevertheless, a regulation 79 certificate did not create the underlying liability and was not a precondition to commencing proceedings. The 12-month limit in regulation 84(3) applied to summary proceedings in magistrates’ courts, not to proceedings in the county court or High Court.
5. Net-pay agreement. Net-pay or free-of-tax employment terms were legally possible and need not be written. On the evidence, however, no such terms had been agreed. The company therefore had no proper legal basis for deducting the unpaid rebates from its annual PAYE returns.

This was a first-instance claim. HMRC issued proceedings in the Durham County Court on 23 January 2008. The proceedings were later transferred to the Newcastle-upon-Tyne County Court and then to the High Court.