A taxpayer which provided administrative and bookkeeping services to its labour provider clients (LPCs) was not an ‘other payer’ under reg. 12 of the Income Tax (PAYE) Regulations (the PAYE Regulations) (SI 2003/2682), and might not rely upon reg. 12 to account under its own reference for PAYE in respect of payments whose purpose and effect were to discharge the liability of a client to pay remuneration to its relevant employees. The taxpayer did fall within ITEPA 2003, s. 687(1) but could rely upon s. 687(2) if, and only if, it accounted for PAYE in respect of the relevant payments under the reference of the relevant client.

Facts

The taxpayer provided administrative and financial outsourcing services for its LPCs who were other businesses and agencies. In particular the taxpayer paid earnings to workers who were employed by its clients, even though it did not employ any of those workers itself, and accounted to the Revenue for PAYE and National Insurance contributions (NICs). The taxpayer accepted that the workers were employed by the clients of the taxpayer and that the taxpayer was not the employer of the workers for employment law purposes. It was also common ground that the earnings were emoluments. In respect of the earnings which were paid to the workers, when the taxpayer accounted for PAYE to the Revenue, it used its own employer's PAYE reference and not the employers’ PAYE references of each of its clients. The Revenue contended that the taxpayer was not entitled to account for PAYE in respect of clients’ workers under its own PAYE reference since it was not an ‘other payer’ to be treated as an employer pursuant to reg. 12 of the PAYE Regulations. They were of the view that they were entitled to ask the taxpayer, when accounting for PAYE in respect of earnings paid to workers of other employers, to use the employers’ PAYE references of those other employers rather than its own employer's PAYE reference. The Revenue had to identify the actual employer because it was the liability of the employer to account for the tax and for mistakes and underpayments.

The taxpayer applied for judicial review of a Revenue decision to that effect. It accepted that the LPC was a person who should account to the Revenue for PAYE in respect of payments of PAYE income by the LPC to workers employed by the LPC. However, it contended that, under reg. 12, it was also permitted (and obliged) to account for PAYE, and was permitted to do so under its own reference, in respect of payments made to workers employed by the LPC since the taxpayer was an ‘other payer’ as defined in reg. 2.

Issue

Whether the taxpayer was entitled to account for its clients’ PAYE and VAT liabilities using its own employer reference.

Decision

Kenneth Parker QC (sitting as a deputy High Court judge) (dismissing the application) said that it was common ground that ‘other payer’ and ‘other payee’ in the regulations were mirror images of each other. An ‘other payer’ was putatively making a relevant payment to an ‘other payee’, and an ‘other payee’ was putatively receiving a relevant payment from an ‘other payer’. However, an ‘other payee’ was defined as ‘a person receiving relevant payments in a capacity other than employee, agency worker, or pensioner’. The relevant workers of the LPC in this case were receiving the relevant payments only because they were workers under contract to the LPC (and for PAYE purposes were, therefore, treated as employees of the LPC); and the only capacity in which they received the payments was in the capacity of worker and employee of the LPC. The taxpayer did not, therefore, make any payments to an ‘other payee’, and did not fall within reg. 2 of the PAYE Regulations. There was no justification in the present context for interpreting an ‘other payee’ in any fictitious sense. It was sufficient simply to look at the facts of the case and to determine in what capacity the employee actually received the payment.

Further, the natural interpretation (that the worker was not an ‘other payee’ and the taxpayer was not an ‘other payer’) furthered the objectives of the PAYE system and avoided the potential uncertainty and complexity of the alternative, namely, that an ‘other payer’ might include a person, X, who made a relevant payment to an employee of Y, where the relevant payment discharged an obligation of Y qua employer to the employee in his or her capacity as an employee of Y. Under the alternative, the focus shifted from the employer of the relevant employee to a third party who had no employment relationship with the employee, but who happened to effect the actual transfer of funds to the employee in discharge of the employer's obligation to his employee.

The natural interpretation of ‘other payer’ also promoted the efficient administration of the PAYE system. From the evidence in this application it appeared that the effective monitoring of PAYE was a substantial task. On the taxpayer's interpretation, the ‘other payer’ was not the employer. Therefore, in monitoring the operation of PAYE arrangements on the alternative interpretation, the Revenue would have to correlate the payments made to the employees of another person by the ‘other payer’ under its own reference with the remuneration of those employees shown in the records of that other person. For that purpose the ‘other payer’ would have to provide regular and reliable information about the employer and about the identity of each of the employees to whom any relevant payment related.

The concept of an ‘other payer’ was designed for a different situation, namely, where X made a payment to an employee of Y that under general principles of income tax would be a taxable emolument, but was not a payment received by the employee in his capacity as such because it was not made under the contract of employment between Y and the employee. Such collateral payments might not be common, but without the concept of an ‘other payer’ and an ‘other payee’ they might otherwise escape the PAYE net (Booth v Mirror Group Newspapers plc [1992] BTC 455 and DTE Financial Services Ltd v Wilson (HMIT) [2001] BTC 159 considered).

The taxpayer had also contended that ITEPA 2003, s. 687, whereby a taxpayer could account for PAYE as an intermediary, did not apply to its present situation. It maintained that, although it paid PAYE income to employees of LPCs, it did not act on behalf of the LPC and did not act at the expense of the LPC, so as to fall within s. 687(4). In any event, the taxpayer properly accounted under s. 687(2), by deducting PAYE and accounting for it under its own reference. However, for the purposes of s. 687(2), the taxpayer did act on behalf of the LPC when it made payments to employees of the LPC. The taxpayer had no contractual relationship with the employees of the LPC. It owed such employees no obligation to pay remuneration to them. The purpose and effect of the payments by the taxpayer to such employees were to discharge the obligation of the LPC to pay remuneration to its employees. The words ‘on behalf of in s. 687(2) were wide enough to include the case where a person, having no such relationship or obligation, discharged an obligation of the employer to pay under the contract of employment remuneration to its employees. However, the taxpayer could take advantage of s. 687(2) only by accounting for PAYE in respect of the relevant payments to employees of the LPC under the reference of the LPC that employed the employees to whom the relevant payments related.

Queen's Bench Division (Administrative Court).
Judgment delivered 17 June 2008.