Salary Overpayments

Brian · Posted: Fri Aug 17, 2007 1:12 pm Post subject: Salary Overpayments

I have had quite a lot of involvement in this area in recent years but something has recently made me think slightly differently on the subject. If we overpay somebody, mainly leavers in this instance, and the net overpayment is repaid back by the ex-employee we can then reclaim the associated tax and NICs. If for any reason the overpayment is never repaid the employer has to stand the cost of these deductions. My question is why ? My logic ( and it may be completely wrong ) is that once an overpayment of salary is made it ceases to be a payment in respect of work carried out for an employer and as such is not subject to tax and NICs. In my view this payment them becomes "something else", but not really sure of what that may be. But in any case the net amount is simply a payment made to somebody in error ( possibly like a bank incorrectly crediting somebody's bank account ). Can somebody give an opinion on this, even if it is to tell me I am going completely off track with this one.

Thanks

Ian Whyteside · Posted: Wed Aug 22, 2007 11:59 am Post subject: Salary overpayments

Brian,

I don't think you're on the wrong track at all and I think it is important that we consider the implications of overpayments fully so that we can understand why the transactions occur this way.

First off the main rules are simple, if the employee fully repays the overpayment then the adjustments for tax and nic simply recognise that the pay no longer exists so the deductions shouldn't exist either.

Should the repayment not be fully repaid the fact that it is not, technically, salary or wage does not change the fact that it is a payment made by the employer to the employee and as such it is liable for statutory deductions in the normal manner. An employer is entitled to pay anything it likes to its employees and even if there is no justifiable employment reason for the payment that alone does not make it non taxable, in the hands of the employee.

Where a proportion of the overpayment is not recovered it remains in the hands of the employee and accordingly has to be assessed to determine the correct tax and nic treatment. We all know that in the company accounts it cannot be classed as pay because it was never earned in the first place but it is still a payment which has passed from employer to employee, it is still a payment which has occurred by virtue of employment.

Thats my view anyway, and i hope it helps to clarify things.

Ian Whyteside

Brian · Posted: Wed Aug 22, 2007 12:27 pm Post subject:

Thanks Ian, yes I can see your point. Just on another issue you mentioned about the accounts. I must admit on the occasions we are not able to recover overpayments I doubt any adjustments are made on the accounts. Any overpayment is left as a salary payment against the appropriate cost centre. Is there a problem in doing this ? and do you think there is a common process that other companies follow in respect of making adjustments to accounts.

Thanks

Ian Whyteside · Posted: Wed Aug 22, 2007 12:44 pm Post subject: Salary overpayments

Brian,

No I don't think there is a problem, the treatment of the payment, for accounting purposes, is down to your accounts staff and if they feel it is most appropriate to leave it where the payroll system originally posted it then that, for your company, is the correct way.

If I, however, was a cost centre manager and it was payroll who created the overpayment then I am not sure I would be happy to leave the un recovered amount in my budget. No problems if it was my own negligence but if it was someone else then, well I would be asking for the charge to be moved.

Local councils have this problem constantly, especially with schools and I know of one payroll office which refunds the overpayment to the schools budget immediately even if the school was responsible for the error. I am busy trying to put a stop to this because I don't think it is right, but it's a battle that is difficult to win given the power schools have.

With that comment, I think I am also answering your final point, that no, I don't think there is an industry best practice on the subject, it's probably down to materiality in the end. If its small and irrelevant, leave it be, if its large and affects the units budget significantly then I think a decision needs to be made concerning the most appropriate place.

Ian Whyteside

Brian · Posted: Wed Aug 22, 2007 1:05 pm Post subject:

Thanks for the reply Ian, but when you say "We all know that in the company accounts it cannot be classed as pay because it was never earned in the first place " does some kind of adjustment in the accounts need to be made to alter this state. This is on the assumption that the charge should be left on the appropriate cost centre in some form. I realise this is outside my responsibility but would be interested to know if further action should be taken in these instances.

ps - 99.9999% of overpayments occur due to errors outside our payroll office, something I think will be the case in many other organisations.

ezrapound · PayPerShop Newbie Joined: 12 Apr 2007 Posts: 4

Recent advice I was given was that as soon as the overpayment is discovered the employer should write to the employee and inform them the payment is no longer a payment of wages as they have not earned the payment. Rather the employer considers the overpayment to be a civil debt due the employer and one that should be repaid immediately, or by such a date.

There may be a good argument for the employer to immediately recover the tax/NICs paid on the overpayment as the payment is now a civil debt that the employer proposes to rigorously pursue rather than a payment of wages.

There may come a point when the amount of the overpayment, and/or the costs involved in enforcing collection become uncommercial and the debt is written off. As long as this is not done too quickly, I cannot see HMRC accusing you of having paid wages on which effectively you haven't paid tax/NICs.

Just a thought...

Ian Congreave

The concept of treating an unrecovered overpayment as a civil debt is a reasonable approach but, to be enforceable in court, I would suggest that such as arrangement must be clear in advance of the situation arising. I doubt whether any court would accept that an employer could simply turn an overpayment into a civil debt simply by calling it such after the event.

It is good practice, for example, in a loan agreement to state that, if the employee leaves before the loan is repaid, the outstanding amount will be deducted from final payments and, if it still cannot be recovered, becomes a civil debt, payable on invoice. That same approach could perhaps be taken with any outstanding overpayment on termination if it is made clear in the contract in advance that this approach will be taken.

It should not be forgotten that overpayments of wages and expenses are not protected by the deductions from wages provisions of employment law. Employers can recover overpayments without the written authority of the employee without fear of a tribunal claim. However, employees still have common law rights in the civil courts and, just as common law does not take kindly to unjust enrichment, it also does not take kindly to employers taking back monies if the employee has a valid belief that the payment was genuine and has spent it in the meantime.
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apserve · PayPerShop Member Joined: 23 Apr 2008 Posts: 60

HMRC will not commit themselves to advise on this matter because there is no legislation. however there is legislation as to what is a contractual payment and any thing received 'by reason of employment'.

An overpayment is not a payment made by reason of employment and cannot be regarded as a taxable emolument. The overpayment is the net amount received by the payee.

There is nothing to stop an employer reversing the overstated taxable pay, tax and ni without having to wait for the overpaid employee to pay back the net cost - this is a myth just as it is a myth that the overpaid employee should pay back the gross and recover the tax themselves.

Further, I did a contract with a County Council a couple of years ago, for a number of reasons there are always problems with Teacher's pension contributions being missed and some of them go back for years.

The net employee cost of the contributions had not yet been collected but HMRC advised to make adjustments to P14s on line decreasing Taxable pay and Tax and changing NI from A to D

Ian Whyteside · Posted: Thu Apr 24, 2008 10:33 pm Post subject: Overpayments

Hi apserve,

I think I have given my view on this in another part of the forum, that I believe a payment does not have to be proper salary in order to be a taxable payment. HMRC will always seek to tax a payment made to the employer and there is no requirement to prove that the amount is contractually due.

You do make a good point regarding the adjustments to pensions and the NIC implications. HMRC is not obliged to allow adjustment from table A to D in cases where the pension admission is backdated for many tax years but in practice, particularly in the public sector, they always seem to allow it, or it may be better to state that in the past they have always allowed it.

With teachers pensions there is a particular and special problem in that it can take a long time in some cases to establish that the employee must be a member so at times it is not the employers or employees fault that an incorrect nic table has been used for a number of tax years.

This in no way detracts from the principle that if the employer makes a payment there is a responsibility to apply the correct tax and nic regime at that time, however, if the situation changes and an overpayment or some other adjustment has to be made there is no harm in asking for the figures to be amended, HMRC might agree to it.

Ian Whyteside

Jennym254 · PayPerShop Regular Joined: 22 Nov 2004 Posts: 77

apserve · PayPerShop Member Joined: 23 Apr 2008 Posts: 60

Hello Jenny,

Actually it was only recently that PART TIME Teachers started to be put into the Teachers Pension Scheme automatically.

Prior to this they used to have to OPT IN to the scheme and here is where a lot of things went wrong, e.g. they didn't opt in a s a part timer and then changed to full time. The Councils missed this on many an occassion. At the job that I mentioned earlier, I suggested an automatic action within the payroll system (it was SAP) to move to the pensions screen whenever their hours changed. The other areas were when genuine opt ins changed schools or LEAs and the Opt In was not pased on to the new payroll.

However my original post was to argue about what I personally consider to be a myth that net overpayments have to be recovered before an employer can recover the tax and ni taken on the overpayment.

Once more 'Why will HMRC not legislate this?' I think that it will be too easy for an employer to argue that no tax or ni was due on athe overpayment to the leaver as the payment could not be regarded as a taxable emolument (in HMRCs own words) received by reason of employment.

Ian Whyteside · Posted: Thu May 01, 2008 10:58 am Post subject: Recovery of overpayments

Apserve,

Yes I do see your point and I accept that there are areas of revenue guidance which suggest that a payment has to be some legitimate amount of remuneration in order for it to be classed as taxable. Taking this strictly you could argue that if it was never a legitimate payment in the first place then IT and NIC can never be levied on it.

However, despite this we do have to take account of revenue practice which they have managed to establish and enforce over the years. There is always an assumption that a payment made by an employer to an employee is remuneration and must be taxed and NIC'd at source before it reaches the hands of the employee.

When the sum of money is declared not remuneration by virtue of it being an overpayment, for whatever reason, it does become not taxable and NICable as long as it does not remain in the hands of the employee or ex employee. Whilst it does so remain it is still a payment made by the employer and as such is always going to be deemed to be a taxable emolument and earnings of some sort.

This issue has been tested both at Ordinary Commissioners and Special Commissioners level and at the Appeal Court, so whatever we feel about the situation the trump cards are held by revenue and employers cannot walk away from an unrecovered overpayment without considering the IT and NIC implications. I have severe reservations about NIC particularly because this is due on earnings and deemed earnings and an overpayment can never be considered to be earnings, but there we are, revenue rules will prevail.

And Jenny, thanks for the comment on TPA, it has been a few years since I last had contact with this organisation and it is clear, from your comments, that things have changed. Either they have all new staff or the personality bypass's have been reversed. Either that or one of my suggestions, Napalm, was taken up immediately after I slammed the phone down on them for the hundredth time, discovering that, once again, common sense was never part of the contract!

Ian Whyteside

Jennym254 · PayPerShop Regular Joined: 22 Nov 2004 Posts: 77