The Demibourne principle—recovering PAYE from an employee
Produced in partnership with Adam Craggs of RPC
The Demibourne principle—recovering PAYE from an employee

The following Tax guidance note Produced in partnership with Adam Craggs of RPC provides comprehensive and up to date legal information covering:

  • The Demibourne principle—recovering PAYE from an employee
  • The Demibourne case
  • Recovery of PAYE from an employee—the Demibourne regulations
  • Recovery of PAYE from an employee—other cases
  • Powers of the FTT

In most circumstances, the PAYE rules require an employer to deduct tax and NICs from payments to employees, and those amounts may not be recovered directly from the employee. This note is about situations in which, exceptionally, PAYE amounts may be recovered from employees.

The case of Demibourne was a landmark decision in the development of the law concerning the interaction between PAYE and an employee’s income tax position. In Demibourne, an employee had paid income tax on his earnings in the belief that he was self-employed. HMRC successfully challenged his employment status, and the employer was required to pay PAYE and NICs on the basis that the individual was an employee, despite the fact that he had already paid income tax on his earnings.

HMRC recognised the potential for unfairness arising from this decision and, as a result, introduced provisions in the Income Tax (PAYE) Regulations 2003, SI 2003/2682 (the PAYE Regs) with effect from 6 April 2008. These regulations allow HMRC to make a direction to transfer an employer’s PAYE liability to an employee in certain circumstances.

The Demibourne case

Facts

Mr Bone was employed by Demibourne Ltd, which owned and ran a hotel, until he reached the age of 65 in April 1993. From April 1993 to April 2002, Mr Bone continued to be engaged by Demibourne to perform