Payroll Tips - July 2009 - Overpaid, over here

HM Revenue & Customs has no formal guidance on the issue of handling overpayments, but has given Simon Parsons permission to publish its response to his queries on the matter.

When an employer finds an overpayment of wages, it has to start asking a lot of questions.

For a start, can it recover the associated overpayment of tax and NICs:
 Where the employer has recovered the overpayment from the employee?
 Where the employer has not yet recovered the overpayment from the employee but is attempting to do so?
 Where the employer plans to write off the overpayment and not recover it?

Should the employer reflect the intended amount for tax and NIC purposes only (making relevant recovery adjustments), even though the amounts may never be recovered?

There is a large variance of practice. Some employers will forget the whole thing and leave the tax and NICs alone; others correct both the tax and NIC values to the collector of taxes as if the amounts had never been paid, even when they fail to recover the overpayment from the employee.

HMRC states: ‘Please make it clear that the tipping point in each case will be different, and the employer will need to contact HMRC where he [the employer] decides not [to] pursue recovery.’ The only published advice is contained in HMRC’s employer guide CWG2, page 17, where it advises the employer to contact the HMRC office.

PAYE must be operated on PAYE Income. This term is defined in Section 683 and is subdivided into three parts, including PAYE employment income. This further term is defined in Section 683(2) as:
(a) Any taxable earnings from an employment in the year; and
(b) Any taxable specific income from an employment for the year.

HMRC states: ‘An unintentional overpayment of wages is not earnings, it is something else; a mistake, but not earnings. If PAYE was operated on something other than taxable earnings, it was applied incorrectly and the amount deducted should be repaid either to the employer or the employee.

‘Where the employer either recovers the overpayment or initiates action to recover it, PAYE should be repaid. If this is in-year it may be done by adjusting the record of earnings paid to the (former) employee. If it is after the relevant tax year then by filing an amendment.’ In other words, by filing P14 and P35.

If the employer decides not to recover the overpayment: ‘The decision… may change the character of the payment, from a payment made in error to an intentional payment of earnings,’ says HMRC.

Equally, if the employer makes little or no effort to recover the overpayment, then HMRC may take the view that: ‘The overpayment is [called] earnings from the date the decision not to recover was made.’

However, ‘if the employer makes an effort to recover but is thwarted and then makes a business decision to cut his/her losses, that is not a decision to pay earnings. It should be possible for the employer to recover PAYE from the tax office’.

With NICs, the situation is very similar to overpayment of tax. Liability for Class 1 NICs arises in any tax week where ‘earnings are paid to or for the benefit of the earner’ [SSCBA 1992 s.6(1)]. Earnings include any remuneration or profit from employment [SSCBA 1992 s.3(1)(a)]. If something is not earnings, it should not be liable to NICs:
(a) Where an error is noted in the current year, the record can be corrected;
(b) Where the error is in a recently completed tax year and the error is spotted before details are submitted, that can also be corrected; but
(c) For any other scenarios the route is via SS Conts Reg, where Reg 52(2) advises that an application may be made to the board of the HMRC for the return of contributions paid in error.

‘There is a tipping point between the two poles, but that will always be a matter of judgement,’ says HMRC. It has no concrete practice or guidance, as the situation is unusual. Each case where the employer does not pursue recovery will need individual consideration by the employer’s tax office.

Payroll World - July 2009