Tax Talk

Employer’s PAYE obligation In this series of articles, Cameron Kotze – the Tax Partner at Ernst and Young – discusses some topical tax issues for our readers.

IN two recent cases individuals have experienced the devastating impact of the law on their personal finances because their employers failed to comply with the employees’ tax (PAYE) withholding obligations of the Income Tax Act. Unfortunately the individuals were not aware of the extent of their liability to the Receiver of Revenue and that their tax liability had accumulated momentum like a runaway train.In one case the employer failed to withhold sufficient PAYE on overtime worked and the short deduction in PAYE has doubled as a result of interest accruing on the outstanding balance that the employee is paying off in instalments.The Income Tax Act places the obligation to withhold PAYE from remuneration paid to employees squarely on the employer.To facilitate this process, tax tables are issued to all employers indicating how much tax must be withheld from the remuneration paid to employees.A monthly PAYE return is issued to employers and the tax withheld from the employees’ remuneration must accompany the completed tax return.The Income Tax Act makes it abundantly clear (Schedule 2 paragraph 2(5)(1)) that any employer who fails to withhold the full amount of PAYE as prescribed by the Act is personally liable for the payment of the PAYE to the Receiver of Revenue.Like with many other rules, there is one exception – if the Receiver of Revenue is satisfied that the failure to deduct PAYE is not due to an intent to postpone payment of tax or to evade the employer’s obligations provided for in the Income Tax Act and the tax liability can be recovered from the employee, the Receiver of Revenue may absolve the employer from his obligation to withhold employees’ tax.Where an employer has not been relieved from his obligation to pay the PAYE to the Receiver of Revenue, the Income Tax Act provides that the employer shall have the right of recovery of the tax paid to the Receiver of Revenue for each employee from future remuneration payable by the employer to the employee.It is the Receiver of Revenue practice to go straight for the employee to recover PAYE that is under-deducted on assessment.The basis for doing this is quite simple – the employee has effectively received the tax that has been under-deducted and it should be recovered from him or her.Whilst this makes sense, the effect of this practice is that the employer is relieved from his obligation to comply with the law where he has under-deducted PAYE.In fact, the employer is relieved from paying any penalties for failure to comply with the law and the employee ends up paying interest on any amount not paid by the due date for the said tax year.In many cases the employee is not aware that there is a tax liability that needs to be settled with the Receiver of Revenue.This is so because many taxpayers just simply do not understand the tax assessment they receive and rightly expect their employer to withhold the correct amount of PAYE from their remuneration.After all, the employer is in a much better position to understand the obligations of the law and has the means to obtain advice and assistance in case of doubt.The Receiver of Revenue should review the current practice to the recover the PAYE under deducted from the employee as a matter of course.From a business perspective, the employer in most cases will be in a much better position to settle the PAYE that has been under deducted, penalty or interest liability.From a just and equitable perspective, the employer is the one that defaulted in the first instance by failing to withhold the right amount of PAYE and should therefore bear the brunt of any penalties or interest that must be paid.On balance it appears that the odds are stacked higher against the employer for not complying with the law and the Receiver of Revenue should be going for the employer first.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.comUnfortunately the individuals were not aware of the extent of their liability to the Receiver of Revenue and that their tax liability had accumulated momentum like a runaway train.In one case the employer failed to withhold sufficient PAYE on overtime worked and the short deduction in PAYE has doubled as a result of interest accruing on the outstanding balance that the employee is paying off in instalments.The Income Tax Act places the obligation to withhold PAYE from remuneration paid to employees squarely on the employer.To facilitate this process, tax tables are issued to all employers indicating how much tax must be withheld from the remuneration paid to employees.A monthly PAYE return is issued to employers and the tax withheld from the employees’ remuneration must accompany the completed tax return.The Income Tax Act makes it abundantly clear (Schedule 2 paragraph 2(5)(1)) that any employer who fails to withhold the full amount of PAYE as prescribed by the Act is personally liable for the payment of the PAYE to the Receiver of Revenue.Like with many other rules, there is one exception – if the Receiver of Revenue is satisfied that the failure to deduct PAYE is not due to an intent to postpone payment of tax or to evade the employer’s obligations provided for in the Income Tax Act and the tax liability can be recovered from the employee, the Receiver of Revenue may absolve the employer from his obligation to withhold employees’ tax.Where an employer has not been relieved from his obligation to pay the PAYE to the Receiver of Revenue, the Income Tax Act provides that the employer shall have the right of recovery of the tax paid to the Receiver of Revenue for each employee from future remuneration payable by the employer to the employee.It is the Receiver of Revenue practice to go straight for the employee to recover PAYE that is under-deducted on assessment.The basis for doing this is quite simple – the employee has effectively received the tax that has been under-deducted and it should be recovered from him or her.Whilst this makes sense, the effect of this practice is that the employer is relieved from his obligation to comply with the law where he has under-deducted PAYE.In fact, the employer is relieved from paying any penalties for failure to comply with the law and the employee ends up paying interest on any amount not paid by the due date for the said tax year.In many cases the employee is not aware that there is a tax liability that needs to be settled with the Receiver of Revenue.This is so because many taxpayers just simply do not understand the tax assessment they receive and rightly expect their employer to withhold the correct amount of PAYE from their remuneration.After all, the employer is in a much better position to understand the obligations of the law and has the means to obtain advice and assistance in case of doubt.The Receiver of Revenue should review the current practice to the recover the PAYE under deducted from the employee as a matter of course.From a business perspective, the employer in most cases will be in a much better position to settle the PAYE that has been under deducted, penalty or interest liability.From a just and equitable perspective, the employer is the one that defaulted in the first instance by failing to withhold the right amount of PAYE and should therefore bear the brunt of any penalties or interest that must be paid. On balance it appears that the odds are stacked higher against the employer for not complying with the law and the Receiver of Revenue should be going for the employer first.* Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com