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Paying tax twice?

An employer is obliged to deduct tax and insurance from any payments made to their employees. But what happens if they get this wrong – perhaps because they mistakenly thought the “employee” was self-employed?

This was the point decided in a 2005 tax case, Demibourne Limited v Revenue & Customs Commissioners. The individual (an odd-job man called Mr Bone) had paid tax on the basis that he was self-employed. However, having concluded that Mr Bone was in fact an employee of the company, the Special Commissioner required the company to “gross up” all the payments they had made to Mr Bone and to pay PAYE and national insurance on this gross amount, without any allowance for the income tax he had already paid. In effect tax was being paid twice on the same income.

This will seem to many to be an most unfair outcome, but one that, in our experience, the Revenue have applied consistently following the Demibourne case. Fortunately, in recent months the Revenue have tried to find a way to avoid double taxation in this type of situation and draft proposals were issued on 28 February 2008.

If these proposals become law, it will become possible – in specified circumstances – for some of the PAYE liability to be transferred to the employee. The liability transferred will not exceed the tax assessed on, or paid by, the employee, leaving him no worse (or better) off.

The new rules would effectively take us back to where we thought we were, before the Demibourne case.

What they do demonstrate, though, is that the Revenue can – and will – work to remove iniquities, even where doing so might leave them worse off.



Date: 17th March, 2008
Author: David Mansell


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