Tax, NICs & Overpayments
Many of you wanted to know the best practice when recovering the overpayment of tax and NICs when:
- the employer has managed to recover the overpayment from the employee
- the employer has not yet recovered the overpayment to the employee but is attempting to do so
- the employer does not expect to be able to recover the overpayment from the employee but will write the overpayment amount off
Should the employer reflect the intended amount for Tax and NICs purposes only (making relevant recovery adjustments) even though amounts may never be recovered?
It’s clear that there is a large variance of practice. Some employers just forget about the whole thing and leave the tax and NICs alone, whilst others correct both the Tax and NICs 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.
The tipping point in each case will be different and the employer will need to contact HM Revenue & Customs where he [the employer] decides not [to] pursue recovery.
The only published advice is contained in the HM Revenue & Customs employer guide CWG2 on page 17 where it advises to contact HM Revenue & Customs.
PAYE must be operated on “PAYE Income”. This term is defined in Section 683 and is subdivided into 3 parts including “PAYE employment income”. This further term is defined in Section 683(2) as:
- any taxable earnings from an employment in the year
- any taxable specific income from an employment for the year
HM Revenue & Customs states that:
An unintentional overpayment of wages is not earnings, it is something else, maybe even 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 after the relevant tax year by filing an amendment [P14 and] P35.
Where the employer decides not to recover the overpayment it’s more difficult:
The decision ... may change the character of the payment from a payment made in error to an intentional payment of earnings”.
Equally if the employer makes little or no effort to recover then HM Revenue & Customs may take the view that “the overpayment is earnings from the date that the decision not to recover was made”.
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. If should be possible for the employer to recover PAYE...
With NICs the situation is very similar to 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)] and earnings include any remuneration or profit from employment [SSCBA 1992 s.3(1)(a)].
If an amount is not part earnings, then it should not be liable to NICs in the following circumstances:
- where an error is noted in the current year the record can be corrected
- 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
- for any other scenarios the route through the SS Conts Reg where Reg 52(2) advises than an application may be made to the Board for the return of contributions paid in error.
References to the adjustment of NICs can be found in CWG2 at para 85(page 64) para 90 (P65) and also on page 66.
There is a tipping point between the two poles, but that will always be a matter of judgement. HM Revenue & Customs has no concrete practice or guidance as the situation is unusual and each case where the employer does not pursue recovery will need individual consideration by the employer’s HM Revenue & Customs office.