Regulation 72 directions: making a director pay PAYE

Where a company wilfully fails to deduct PAYE from a director’s pay and the director knows it, HMRC can direct under Condition B of regulation 72 of the Income Tax (Pay As You Earn) Regulations 2003 that the company is not liable for the missing tax, so the director pays it personally through Self Assessment, with interest. In practice HMRC uses this, and a parallel power in regulation 81 after a determination, mainly where the company is insolvent or has stopped trading.

Why would HMRC make a director pay the company’s PAYE?

Normally it cannot. HMRC’s Debt Management and Banking Manual at DMBM522830 explains that regulations 67G and 68 make an employer pay HMRC not only the tax it deducted but also any tax it should have deducted. The shortfall is the employer’s debt.

Regulation 72 is the exception. It applies where the tax the employer was liable to deduct exceeds the tax it actually deducted, and either Condition A or Condition B is met. Condition A covers honest payroll mistakes made despite reasonable care, and is usually raised by the employer; it is explained in our guide to regulation 72 directions. This page is about Condition B, which is aimed at people who knew what was going on. SAM142001 says it typically arises where the employee was a director or was involved in running PAYE, for example as a pay clerk, and the papers are referred to a PAYE Directions Unit.

What does HMRC have to show under Condition B?

Regulation 72(4) requires HMRC to be of the opinion that the employee received the payments knowing that the employer wilfully failed to deduct the tax that should have been deducted from them. That has two parts:

• a wilful failure by the employer, not an oversight; and
• knowledge by the employee at the time the payments were received.

Unlike Condition A, there is no question of reasonable care. Under regulation 72(5A)(b) the direction notice goes to the employee only and must state the date it was issued. SAM142050 adds that a Condition B direction can only be authorised by a PAYE Directions Team, that the employee and any agent are told in writing, and that there is no time limit for granting a direction.

A director who set up the payroll, approved gross payments or decided not to operate PAYE on a bonus will usually struggle to argue they did not know. A director who had no involvement in payroll and was paid through it with deductions shown is in a very different position.

When does HMRC actually use it?

Mostly when the company cannot pay. SAM142050 says Condition B is mainly used in director cases where there is little or no prospect of recovering the tax from the company, for example because it is insolvent or has ceased trading. If the company still exists and is trading, a Condition B direction is not usually considered.

There is a second route. Under regulation 80 HMRC can determine the PAYE a company owes, and regulation 80(3) and SAM142060 explain that once that determination has been made, a regulation 72 direction can no longer be sought for the same tax. Instead, regulation 81 applies if the determined tax is not paid within 30 days of the determination becoming final and conclusive. HMRC can then direct that the employer is not liable if:

• the employee received the payments knowing the employer wilfully failed to deduct the tax (Condition A of regulation 81, the same knowledge test); or
• the unpaid tax relates to a notional payment that the employer was required to account for under regulation 62(5) (Condition B of regulation 81).

SAM142070 says regulation 81 is also used mainly in director cases with little prospect of recovery from the company, and that when a direction is made the regulation 80 tax is remitted against the company and becomes payable by the named directors or employees.

How does a direction change the director’s own tax return?

It removes the credit the director would otherwise get. Regulation 185(5) normally treats tax the employer was liable to deduct but failed to deduct as a credit in the employee’s Self Assessment, although only up to the amount that would otherwise be payable, so it can never create a repayment. Regulation 185(6) excludes “direction tax”, and regulations 72(6) and 81(5) say the directed amount must not be added.

SAM142050 tells officers that after a Condition B direction the credit must be restricted to the tax actually suffered by the employee, or any amount the PAYE Directions Team specifies as paid by the employer. SAM142020 warns that the direction or covering note may show that less tax, or none, was deducted than earlier information suggested, and that the credit must then be cut. SAM142010 says HMRC does this through an enquiry or, if the enquiry window has closed, a discovery assessment. So payslips or a P60 showing PAYE that was never really deducted do not protect the director.

What interest does the director pay?

Regulation 72(7) says tax payable by an employee under a Condition B direction carries interest as if it were unpaid tax due from an employer, under section 101 of the Finance Act 2009; regulation 81(6) does the same for regulation 81 directions. SAM142050 explains that this interest runs from 19 April after the end of the tax year concerned until the tax is paid or Self Assessment interest takes over, and SAM142010 says that if the extra tax is not paid by the Self Assessment filing date, normally 31 January, ordinary late payment interest follows. Because there is no time limit for a direction, the interest on an old year can be substantial.

How can a director challenge a Condition B direction?

Regulation 72C allows an appeal by notice to HMRC within 30 days of the issue of the direction notice, stating the grounds. Only two grounds are allowed:

1. the employee did not receive the payments knowing that the employer wilfully failed to deduct the tax; or
2. the excess, meaning the amount of tax, is wrong.

The tribunal can set the direction aside or increase or reduce the amount. Arguing that HMRC should chase the company instead is not a ground. Useful evidence goes to knowledge: who ran the payroll, what the director was told by the bookkeeper or accountant, board minutes, and whether payslips and payroll submissions showed deductions the director had reason to believe were genuine.

How does this sit alongside the other ways HMRC reaches directors?

• Section 223 ITEPA 2003. If the company, or someone else, later pays HMRC tax that should have been deducted from a director’s pay, the amount paid is treated as the director’s earnings, reduced by anything deducted or made good, with an exception for some directors without a material interest. SAM142060 says tax in a regulation 80 determination attributable to a director is a benefit under section 222 or section 223.
• Section 222 ITEPA 2003 taxes employees who do not make good PAYE on notional payments; see section 222.
• National Insurance. Regulation 72 is part of the PAYE income tax rules. Unpaid company contributions are pursued separately, for example by a personal liability notice under section 121C of the Social Security Administration Act 1992 where the failure is attributable to fraud or neglect by an officer.
• Joint and several liability notices can make directors liable for a company’s tax in some insolvency and avoidance cases; see joint and several liability notices.

How might it work in practice?

Illustration only. Sam and Lucy are the two directors of a small company. Sam runs the payroll. During 2023 to 2024 he pays himself £5,000 a month gross, telling Lucy the company will “settle up with HMRC later”. Lucy’s own salary goes through payroll with PAYE deducted. The company enters liquidation owing PAYE.

1. HMRC’s officer finds that Sam set up and approved his own gross payments. A PAYE Directions Team authorises a Condition B direction to Sam for the tax that should have been deducted.
2. The company is no longer liable for that amount. Sam must pay it through Self Assessment, with interest from 19 April 2024.
3. Any PAYE credit Sam claimed for 2023 to 2024 is cut to the tax actually deducted, which is nil.
4. Sam has 30 days to appeal, but only on the grounds that he did not know or that the figure is wrong.
5. No direction is made against Lucy, because tax was actually deducted from her pay.

What mistakes do directors make?

• Assuming limited liability protects them from tax that should have been deducted from their own pay.
• Claiming PAYE credits in a personal return for deductions that never really happened.
• Missing the 30 day appeal window, or appealing on grounds the regulations do not allow.
• Thinking an old year is safe: SAM142050 says there is no time limit for a direction.
• Overlooking the wider tax responsibilities of directors, including National Insurance.

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Related Accountapedia entries

• Regulation 72 directions: shifting PAYE to the employee
• Can a company pay a dividend after a loss making year
• When a director’s pay counts as received
• Regulation 80 determinations for unpaid PAYE
• The VAT evasion offence under section 72

Related cover: Directors and officers liability insurance and Management liability insurance.

Sources

• GOV.UK: Manual page DMBM522830
• legislation.gov.uk: SI 2003/2682, regulation 72
• GOV.UK: Manual page SAM142001
• GOV.UK: Manual page SAM142050
• GOV.UK: Manual page SAM142060
• legislation.gov.uk: SI 2003/2682, regulation 81
• GOV.UK: Manual page SAM142070
• legislation.gov.uk: SI 2003/2682, regulation 185
• GOV.UK: Manual page SAM142020
• GOV.UK: Manual page SAM142010

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.