PAYE21130 - Employer records: maintain employer record: insolvency of employer

The formal insolvency of an employer has one of two aims

  • To close down the business
Or
  • To rescue the business by allowing it to continue

The term insolvency is generally used to refer to

  • Bankruptcies
  • Liquidations
  • Receiverships
  • Administrations
  • Voluntary arrangements for companies, partnerships and individuals

The action to take when an employer becomes insolvent depends on whether the business

  • Has ended
Or
  • Is continued by the insolvency practitioner (IP)
Or
  • Employer enters Voluntary Arrangement (VA)

Business ends

The insolvency practitioner or the debtor employer in a VA follows the normal procedures for an employee leaving the employment, and issues form P45.

A cessation date is entered onto the existing employer record. The cessation date is the date of insolvency.

Employer continues in administration

Where an IP takes control of the business as an administrator or administrative receiver they are required to deduct and account for PAYE as agent of the company. The company remains the employer under PAYE Regulations.

There is no specific legislative requirement to set up a new scheme, so for any company trading on in Administration HMRC will no longer require a new scheme to be opened and the company’s existing PAYE scheme at the date of Administration can continue to be used.

PAYE deductions

Where an employer enters a formal insolvency procedure such as:

  • Administration
  • Compulsory liquidation
  • Creditors’ voluntary liquidation
  • Bankruptcy or Sequestration

and a payment to an employee covers both pre and post appointment periods, the person making the payment should pay all the income tax and NIC due on any pay issued to employee(s) to HMRC as an expense of the insolvency. This is because Section 18 of the Income Tax (Earnings and Pensions) Act 2003 states that PAYE applies at: “the time the payment is made” or “the time when a person becomes entitled to payment of or on account of the earnings”. All the income tax and NIC due at the time of payment should be returned to HMRC by the employer who made the payments. EIM42270 provides further guidance on this.

Employer enters Voluntary Arrangement

After approval of a Voluntary Arrangement if a business continues to employ staff the debtor is the employer. They may retain most, but lay off some, employees and they are required to operate PAYE in the normal way.

The existing employer record is ceased. The cessation date is the day prior to the approval of the Voluntary Arrangement.

A new employer record is created in the name of the employer.

Note: 'Voluntary Arrangement' must not be included in the employer name or address details of any employer record.

The Enforcement & Insolvency Service, Newcastle will advise you when an employer has become bankrupt, gone into liquidation or receivership.

The Voluntary Arrangement Service, Worthing will advise by VAS8 when an employer has entered into a voluntary arrangement.

The following is a list of forms that you may receive from ICHU, VAS or IS

  • INSOL219 - request from ICHU to create a new employer record for the post insolvency period
  • INSOL238 - request from ICHU to cease an employer record
  • VAS8 - advice from VAS to cease an employer record and create a new employer record
  • VAS12 - advice request from VAS that a voluntary arrangement proposal has been rejected. The employer record does not require updating

You must not take action, without confirmation or request from ICHU, VAS, or IS, to

  • Cease or create new employer records
Or
  • Merge employer records for the same employer where the insolvency indicator is set in any one of them