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Income Tax (Earnings and Pensions) Act 2003

Chapter 3 PAYE: special types of payer or payee

2767.This Chapter deals with PAYE obligations where there are special types of payer or payee. The majority of these provisions were introduced to counter avoidance of PAYE – see paragraph 2733.

2768.Section 687 treats certain payments of PAYE income actually made by an intermediary of an employer as made by the employer.

2769.Section 688 treats agency workers who are treated as having earnings by section 44 as employees of the agency for the purposes of most of the provisions for special types of payer, payee and types of income in this Chapter and Chapter 4. It also treats the client rather than the agency as the employer for the purposes of those provisions in relation to some payments.

2770.Section 689 deals with employees who work in the United Kingdom but whose employer is not subject to PAYE regulations, typically where the employer has no UK presence. It treats the person for whom an employee works in the United Kingdom as if that person had made certain payments which are actually made by the employer or an intermediary of the employer.

2771.Section 690 applies only to employees who are not resident (or not ordinarily resident) in the United Kingdom and who work partly in the United Kingdom and partly not. It treats payments of income of the employee as payments of PAYE income. It also provides for the Inland Revenue to direct that only a proportion of such payments be treated as PAYE income.

2772.Section 691 deals with workers provided by contractors. It provides for the Board to direct that PAYE must be operated by the person employees actually work for rather than their employer if that person pays for their work and the employer is not likely to operate PAYE properly.

2773.Section 692 provides for regulations to require PAYE to be operated on tips which are collected and shared among a group of employees by the person who runs that arrangement. It also provides for the employer to operate PAYE in some circumstances if the person who shares out the tips fails to do so properly.

Section 687: Payments by intermediary

2774.This section deals with payments made by intermediaries. It derives from section 203B of ICTA.

2775.Section 203B was introduced as part of a package of PAYE provisions in FA 1994. It prevents avoidance of PAYE by using an intermediary not subject to PAYE regulations to make payments. An example is an intermediary outside the UK tax net.

2776.Subsection (1) states the basic proposition that a payment of income by an intermediary is treated as a payment by the employer. This section (like others in this and later Chapters) refers explicitly to “employer” and “employee”. These terms take their meanings from section 712. The commentary on them uses the words in the same sense.

2777.Subsection (2) disapplies subsection (1) if the intermediary complies with the PAYE regulations. The wording in this Act makes it clearer that the intermediary must both deduct and account for tax in accordance with the PAYE regulations. See Note 58 in Annex 2.

2778.Similar clarifications have been made in sections 689(1)(d) and 691(1)(c).

2779.Section 203B(5) applies section 839 of ICTA to give the meaning of connected persons. Section 718 does that for this Act as a whole so no provision to that effect is needed in subsection (4).

Section 688: Agency workers

2780.This section ensures that agency workers are, broadly speaking, treated in the same way as other workers for the purposes of this Part. It derives from section 203L(1A), (1B) and (1C) of ICTA.

2781.Subsection (1) provides that where section 44 (agency workers) applies then this Chapter (except section 691), Chapter 4 and section 710 apply as if the agency employed the worker.

2782.Subsection (2) treats the client rather than the agency as the employer if a payment is made by an intermediary of the client.

Section 689: Employee of non-UK employer

2783.This section concerns employees working in the United Kingdom for someone who is not their employer. It derives from section 203C of ICTA.

2784.The section provides for tax to be accounted for under PAYE by the person for whom the employee is working if the employer does not do so. An example is an employee of an overseas company who comes to the United Kingdom to work for a subsidiary but not as an employee of the subsidiary. The employer remains overseas and cannot be required to operate PAYE. It may also be impracticable for it to do so.

2785.Subsection (1)(d) follows the approach taken in section 687. See Note 58 in Annex 2.

2786.Subsection (4) deals with the possibility that income is provided to the employee in the form of a voucher, credit card, readily convertible asset or other way which gives rise to a “notional payment”. It treats any such notional payments in the same way as actual payments for the purposes of this section. But (as with notional payments generally) there is no requirement to “gross up” the notional payment for PAYE purposes.

Section 690: Employee non-resident etc.

2787.This section makes special provisions for PAYE for employees who are both non-resident (or not ordinarily resident) and working partly in the United Kingdom and partly not. It derives from section 203D of ICTA.

2788.An employee in these circumstances may be chargeable to income tax on only some of the employment income. Payments which were partly of PAYE income and partly not would not be subject to deductions. This section provides that payments (or a proportion of payments) are subject to PAYE.

2789.Subsection (2) provides for a direction to be made, on application by the “appropriate person” (see subsection (3)) to the Inland Revenue. The direction states what proportion of income from that employment is to be subject to PAYE deductions. It contains two minor changes:

  • directions under this section affect only PAYE income paid by or on behalf of the employer. This change is then followed through in subsections (3)(b), (7) and (8). See Change 148 in Annex 1.

  • it allows a direction to be made where the income which is not assessable is ascertainable. See Change 149 in Annex 1.

2790.Subsection (7) ensures that when a payment to which a direction under subsection (2) applies is made to the employee, PAYE deductions are made from the proportion of the payment specified in the direction. This is achieved by deeming the proportion to be PAYE income.

2791.Subsection (8) sets out the position if no direction is made. Then all the payment is subject to PAYE.

2792.Subsection (9) makes sure that this section does not affect the employee’s tax liability.

2793.Subsection (10) is new. It deals with how this section is modified if both it and section 689 apply to the same employment. This could happen if the employer (or an intermediary of the employer) is outside the UK tax net. Section 689 might then lead a person in the United Kingdom for whom the employee is working to have to operate PAYE. See Change 149 in Annex 1.

Section 691: Mobile UK workforce

2794.This section provides that where, in the case of a contractor providing their employees to a person, it is unlikely that PAYE will be deducted or accounted for, the Board of Inland Revenue may direct that that person must deduct and account for tax. It derives from section 203E of ICTA.

2795.Subsection (1) sets out the conditions for the section to apply and labels as the “relevant person” the person for whom the employees work. Subsection (1)(c) follows the approach taken in section 687. See Note 58 in Annex 2.

2796.Subsection (2) sets out what the Board may do by way of a direction. This is broadly to require the relevant person to deduct tax when making payments for the work. This need not be a payment to the employees. It may be a payment to the contractor.

2797.Subsection (3) sets out what the direction must do and how it may at any time be withdrawn.

2798.Subsection (4) requires the Board to try to give the contractor a copy of any direction.

2799.Subsection (5) deals with the effect of a direction under subsection (2). When there are employees of the contractor working for the relevant person then the relevant person is to make deductions in accordance with PAYE regulations from any payment made for the work done (whether a payment to the contractor or another person). This is to be done by treating the amount of the payment attributable to each employee’s work as if it were a payment of PAYE income to that employee.

Section 692: Organised arrangements for sharing tips

2800.This section allows the PAYE regulations to make provision for PAYE to be operated on tips which are collected and shared among a group of employees by whoever runs that arrangement; and also to require the employer to operate PAYE in some circumstances if that person fails to operate PAYE properly. It derives from regulation 5 of the Income Tax (Employments) Regulations 1993 (S.I. 1993 No 744).

2801.This section is included in to give readers a more complete set of provisions which deal with who is the “employer” for PAYE purposes.

2802.Regulation 5 originated in SI 1965 No 516. It was introduced then to make clear that a person (other than the employer) who distributes to employees money from an organised arrangement for sharing tips had the same responsibilities as an employer, unless the Board directed otherwise. This legislation was amended by SI 1994 No 775 to make clear what happens if such a person does not operate PAYE properly.

2803.The regulations refer to the person who shares the tips as the “tronc-master”. This term is still used in practice in some such schemes. It is not used in this Act as users commented in the course of consultation that it was archaic and/or obscure. The term will be omitted from the regulations when they are rewritten.

2804.These provisions are in the current PAYE regulations and have been for many years but their inclusion in this Act is a minor change in the law. See Change 150 in Annex 1.

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