The taxman has published the legislation following a special commissioners case involving hotel company Demibourne, where it was found that the company should have been responsible for an employee’s PAYE, but that the employee had paid the income tax via self-assessment instead.

Special commissioner John Clark found that although the tax had been paid, Demibourne was liable as it should have taken responsibility for the payment of the tax through PAYE.

Clark said HMRC had no discretion to offset the tax paid by an employee against the PAYE liability of the employer, and was obliged to collect tax from the employer.

The case confirmed that where an employment relationship exists, the employer is responsible for deducting tax from payments made to the employee in accordance with the PAYE Regulations. HMRC did not have the discretion to choose whether to collect tax from the employer or the employee.

HMRC has tried to deal with this anomaly by collecting the tax from the company and then refunding the employee. It is then up to the employee to repay the amount back to the business.

This has proved difficult to implement, as employers have found themselves out of pocket with no easy way to recover the money from workers, especially those who no longer work for a business. But with the new legislation it is hoped that such difficulties will be erased.

Effectively the new rules will allow HMRC to transfer an employer’s PAYE liability to an employee if it can be shown that the tax owed under PAYE has been paid by via self-assessment.

The move has been welcomed by advisers, who believe the new law, which comes into effect on 6 April this year, will make the process easier to manage.

‘The employer will no longer be liable for the PAYE that was due - removing the circuitous and often unproductive sequence of tax charges, refunds and offsets,’ a PricewaterhouseCoopers briefing note said.