Need to pay back a JRS Grant? Here's how
16 October 2020
Posted by: LITRG
By Low Income Tax Reform Group
Employers need to address any Job Retention Scheme (JRS) claims on a timely basis and should proceed carefully if they are thinking about trying to recover any amounts repayable to HMRC from employees. Employers in this position are advised to seek professional advice.
Employers may need to pay back JRS grants in several circumstances. For example, where they have made a mistake in their calculations, as discussed here, or where they did not meet the conditions to receive a JRS grant in the first place, for example, where their employee continued working prior to the introduction of the flexible furlough scheme.
- The claw back provisions
- What should employers do now?
- Can employers recover JRS payments, repayable to HMRC, from employees?
- How will a permissible deduction be made?
As the JRS scheme starts to wind down, HMRC are already in the process of contacting some employers to confirm whether their JRS claims are correct. It is important that employers check their claims carefully and deal with any over claims as soon as possible.
The claw back provisions
If you have over claimed a JRS grant as an employer and cannot or do not make a correction ‘informally’, you are required to notify HMRC that you need to make a repayment.
The timescale within which to notify HMRC of any overpayments that need to be paid back is relatively short – essentially by the latest of 90 days after receiving the money you need to pay back and 20 October 2020.
Any notified amounts can be recovered from employers by HMRC levying a special tax charge equal to 100% of the amount to be repaid. HMRC is able to charge penalties in cases of a failure to notify HMRC of a known overpayment within the relevant timescale. This is discussed further in new HMRC guidance here.
Details of the claw back and penalty provisions for employers can be found in an article written by our ATT colleagues for Accountancy Age.
What should employers do now?
Employers should double check whether their JRS claims were correct as soon as possible – taking professional advice if appropriate. This will be particularly important for claims made early on in the scheme when there was a lot of confusion about what the rules were.
Can employers recover JRS payments, repayable to HMRC, from employees?
An employer’s position under the JRS is a separate issue to its obligation to pay its employees under employment law. There is no automatic right for an employer to require an employee to repay an amount of JRS grant paid to them, even where it subsequently proves to be incorrect under the law governing the JRS scheme.
Whether you can recover payments that are repayable to HMRC from your employee is dealt with by existing employment law rules.
While the Employment Rights Act 1996 allows employers to make deductions from an employee’s future wages to recover overpayments of wages made by mistake (which could potentially be used if an employer discovers they have made an error and over-claimed their JRS grant and overpaid an employee, in good faith, an amount which they now need to pay back), it is sometimes possible for an employee to object to such a deduction.
You should seek appropriate employment law advice, for example from ACAS, before making any deductions.
How will a permissible deduction be made?
In situations where an employer can legitimately make a deduction from an employee’s wages to claw back some of the wages they have overpaid them, it is good practice for the repayment arrangements to be agreed with the employee and for the employer to be flexible and reasonable so the employee is able to afford the repayments – perhaps over a period of time.
An employer should then follow the applicable rules, terms and procedures that usually govern recovery of any potential overpayments of wages.
HMRC does not play a role in that aspect of the relationship between the employer and the employee – even if the overpayment of wages is due to the JRS. However, there may be consequences for tax and National Insurance (NIC) that flow from the recovery of overpaid wages, and these would follow the normal rules in place for employers.
For example, where an employer overpays an employee who remains in employment, an employer might just deduct the gross overpayment from their gross wages (note that such deductions from pay do not affect a worker’s minimum wage pay).
This should leave the employee’s ‘net’ tax position, more or less the same as if the overpayment hadn’t happened, as we can see in this example:
Adam is usually paid £350 a week, however one week his employer paid him £400 by mistake. After tax and NIC, Adam was better off by £34.
In order the claw back the overpayment, in the next pay period, Adam’s employer reduces Adam’s gross pay of £350 by £50:
Reducing Adam’s gross pay by £50 results in Adam receiving £34 less by way of net pay, which therefore gives the correct result.
However, sometimes there will be a mismatch using this mechanism – for example, if the reduction in gross pay causes an employee to move below the relevant threshold for the deductions.
An employee shouldn’t be asked to pay back more than they actually received. As an alternative therefore, or where an employee has left (and the employer decides not to simply write the overpaid amount off), an employer should work out the amount of the overpayment that the employee actually received (that is, the net amount, after deduction of tax and NIC) and recover that (either by making a deduction from net pay or by asking the employee to pay it back by cheque for example).
Once that has been received, the employer should go back and rewrite the incorrect payroll entries to recover the overpaid tax and NIC from HMRC. This should restore the status quo.