PAYE issue employer paid employee invoices

[Callie09]

Hi,

I'm in an usual situation having taken over from someone else and want some advice.
Basically the employer, having been sued for inducement to breach employment contracts, has paid the defense lawyers direct for their services, despite invoices issued to employees.

HMRC have know come knocking wanting their slice of the pie being the tax on these payments that theroretically should have been made via payroll to the employee and then paid out of net earnings.

Although technically, I see what HMRC are doing, morally it feels very wrong. The Company set out to assist the employees who were unfortunately also caught up in this case and went on to accrue some £200k plus costs in legal fees. They simply would not have been able to pay this themselves and in reality the Company would have suffered a massive loss of reputation if we hadn't supported them through this process.

In addition, we also won back 95% of these costs as the court awarded our costs back.

HMRC are arguing now that tax is payable on the £200k and will not allow the costs awarded back to us to be offset against this.

Does anyone have any useful advice?

Thanks

 

[heyadrian]

Yes tax is payable on the 200k. But on the other side, once the EMPLOYEES have paid PAYE on 200k, they will receive it back in the next tax year as they were grossly overtaxed due to them paying you the NET amount back. This too should be returned to yourselves. In short, the amount given to them, the 200k was intact a loan which was expected to be paid back in full. If any underpayment is made, the difference is then liable for PAYE.

Costs aren't offset against PAYE, that's why they won't allow you to do so. Although the HMRC appears to US as one body, they are in-fact a myriad of bodies all working as one organism. These individual bodies work separately from one another and adhere to separate laws.

Another problem that you _could_ face, but it's not 100% certain, is the 0% interest of the loan. The HMRC could turn around and say that the non payment of taxable interest is seen as a benefit and they could tax the employees based on the amount saved by not taking out a bank loan.

The proper way to have gone about this is:

1) Employer signs agreement with lawyer to cover costs to pay for the suit i.e. the employee is REPRESENTING the company rather than themselves in court and in the case
2) The money is paid directly to the law firm / whoever during the case
3) Any awards would be directed at the company themselves
4) Any shortfall of costs not covered could be written off against tax

I can't see any other ways about this one... It's going to get messy!