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ACCA Applied Knowledge · Business and Technology · Accounting and finance functions within business organisations

A manufacturing company's payroll department calculates gross pay for each employee and then deducts income tax and employee social security contributions before paying the net amount. Which of the following best describes the company's responsibility for the income tax deducted?

The company must pay the income tax it deducts from employees' wages over to the tax authority. It acts as a collecting agent for the authority, so the deducted amount is a liability to the authority, not income or a reduction of the company's own expenses.

  1. AIt must pay the deducted tax over to the tax authority, because it is collecting the tax on the authority's behalfCorrect
  2. BIt may retain the deducted tax as a reduction of its own payroll expense, because the tax relates to employee earnings
  3. CIt must refund the deducted tax to employees at the year end, because the deduction is only a temporary holding of their pay

Explanation

Under a pay-as-you-earn style system the employer acts as a collecting agent. The tax withheld from employees' pay is a liability of the employer to the tax authority until it is paid over. It is not the employer's own expense, so it cannot be retained, and it is not automatically refunded to employees by the employer.

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