PAYE140050 - The PAYE discretion at s684(7A)(b) ITEPA 2003 and contractor loans avoidance schemes: contents: where an officer has decided to exercise the PAYE discretion

The officer should inform the individual in writing that HMRC believes the amounts received are taxable as employment income.  The officer should explain that they are exercising the PAYE discretion to decide that the End Client or the UK Agency need not comply with the PAYE Regulations for the tax year or years in question.  The written notification should explain that, as a consequence of using the PAYE discretion the individual needs to pay the full amount of their tax liability, and that the customer is not entitled to have an amount treated as tax deducted set against that liability.

The written notification (the decision letter) should be suitably adapted where the PAYE discretion is being exercised on a contingent basis, for example in cases where HMRC is challenging that a deemed employment applies, and the discretion is being applied contingent upon the individual’s view prevailing at Tribunal.  

The decision letter should invite the individual to make written representations if they consider they have information or documents that will affect the decisionmaker’s decision to exercise the PAYE discretion. The type of evidence which may affect the decisionmaker’s decision may vary depending on the Category of scheme used, examples of evidence for each Category are outlined below. 

Category 1, evidence that

  • the End Client (before 2014) or UK Agency (from 2014) was aware that the individual was using an avoidance scheme with an offshore employer
  • reasonable due diligence by the End Client or UK Agency should have meant that they were aware that the individual was using an avoidance scheme with an offshore employer and would have had sufficient information to determine they were required to operate PAYE
  • they are, or immediately before joining the scheme were, a company director of the End Client (before 2014) or UK Agency (from 2014)

Category 2, evidence that

  • the UK Agency was aware no PAYE had been operated in the supply chain
  • the UK Agency was aware of the timing and nature of the payment of PAYE income 
  • they are, or immediately before joining the scheme were, a company director of the UK Agency

For Category 3, evidence that

  • the UK Agency was aware of its obligation to operate PAYE on the Loan Charge. Evidence to support this may show that
  • the UK agency was aware of the presence of the scheme and the involvement of loans
  • the individual satisfied their requirements to inform the UK Agency of the outstanding balance of the loan
  • the UK Agency was informed of the identity of all parties in the contractual chain  
  • they are, or immediately before joining the scheme were, a company director of the UK Agency

The officer should take account of any representations the individual makes about this decision and should review the case further if the individual provides additional facts or evidence which might impact on the appropriateness or otherwise of using the PAYE discretion with advice from a G7 or higher grade colleague if necessary. When reviewing representations, the officer should review their decision whilst considering this guidance.

If an officer considers the PAYE discretion should not have been exercised after reviewing the individual’s representations, they should write to the individual to inform them that following a review of the representations made by the individual an officer of HMRC will not use the PAYE discretion and explain the impact of this decision.