PAYE21130 | Employer records: maintain employer record: insolvency of employer

The formal insolvency of an employer has one of two aims

• To close down the business
  Or

• To rescue the business by allowing it to continue

The term insolvency is generally used to refer to

• Bankruptcies

• Liquidations

• Receiverships

• Administrations

• Voluntary arrangements for companies, partnerships and individuals

The action to take when an employer becomes insolvent depends on whether the business

• Has ended
  Or

• Is continued by the insolvency practitioner (IP)
  Or

• Employer enters Voluntary Arrangement (VA)

Business ends

The insolvency practitioner or the debtor employer in a VA follows the normal procedures for an employee leaving the employment, and issues form P45.

A cessation date is entered onto the existing employer record. The cessation date is the date of insolvency.

Employer continues in administration

Where an IP takes control of the business as an administrator or administrative receiver they are required to deduct and account for PAYE as agent of the company. The company remains the employer under PAYE Regulations.

There is no specific legislative requirement to set up a new scheme, so for any company trading on in Administration HMRC will no longer require a new scheme to be opened and the company’s existing PAYE scheme at the date of Administration can continue to be used.

PAYE deductions

Where an employer enters a formal insolvency procedure such as:

• Administration

• Compulsory liquidation

• Creditors’ voluntary liquidation

• Bankruptcy or Sequestration

and a payment to an employee covers both pre and post appointment periods, the person making the payment should pay all the income tax and NIC due on any pay issued to employee(s) to HMRC as an expense of the insolvency. This is because Section 18 of the Income Tax (Earnings and Pensions) Act 2003 states that PAYE applies at: “the time the payment is made” or “the time when a person becomes entitled to payment of or on account of the earnings”. All the income tax and NIC due at the time of payment should be returned to HMRC by the employer who made the payments. EIM42270 provides further guidance on this.

Employer enters Voluntary Arrangement

After approval of a Voluntary Arrangement if a business continues to employ staff the debtor is the employer. They may retain most, but lay off some, employees and they are required to operate PAYE in the normal way.