What is a deemed employer PAYE debt under section 688AA of ITEPA 2003?

A deemed employer PAYE debt arises when a deemed employer owes PAYE as a result of being treated as making a direct payment to a worker under the off-payroll working rules, and HMRC considers there is no realistic prospect of recovering the amount from that employer within a reasonable period.

Who can HMRC pursue to recover unpaid PAYE under the off-payroll working rules?

HMRC can recover the debt from a 'relevant person' in the labour supply chain. This is typically the highest party, usually the end client, or the second highest party if that party is a qualifying person at the time the deemed payment was treated as being made, such as a UK-based entity that is not small.

Does section 688AA apply to managed service company arrangements?

No. The recovery mechanism under section 688AA does not apply where the deemed direct payment arises by virtue of the managed service company provisions under section 61WA of ITEPA 2003. It is confined to debts arising specifically from the off-payroll working rules governing workers' services provided through intermediaries.

Can you give an example of how section 688AA works in a supply chain?

If a recruitment agency is the deemed employer but becomes insolvent and cannot pay PAYE owed on a worker's deemed payment, HMRC may recover the outstanding PAYE debt from the end client at the top of the supply chain, or from another qualifying intermediary sitting between the end client and the defaulting deemed employer.

Income Tax (Earnings and Pensions) Act 2003 section 688AA

Workers' services provided through intermediaries: recovery of PAYE

Section 688AA deals with the recovery of unpaid PAYE tax debts arising from the off-payroll working rules, where the original deemed employer cannot pay, by allowing HMRC to pursue other parties higher up in the labour supply chain.

PAYE regulations may provide for the recovery of a "deemed employer PAYE debt" from another party in the supply chain when the deemed employer cannot pay
A deemed employer PAYE debt arises where a deemed employer owes PAYE as a result of being treated as making a direct payment to a worker under the off-payroll working rules, and HMRC considers there is no realistic prospect of recovering the amount from that employer within a reasonable period
The debt can be recovered from a "relevant person", who is either the highest party in the labour supply chain (typically the end client) or the second highest party if that party is a qualifying person at the time the deemed payment was treated as being made
This recovery mechanism does not apply where the deemed direct payment arises by virtue of the managed service company provisions under section 61WA

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