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TonyTax, Tax Consultant
Category: Tax
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Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I have been paid using the net agreement system by

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I have been paid using the net agreement system by my employers, I mentioned that I have had a personal tax refund due to an incorrect tax code, they are claiming the refund is rightfully theirs as they claim they pay my taxes, they have overpaid therefore it is theirs.
I have researched this and on my understanding...
a) Under the net agreement system an employer agrees to pay the necessary gross in order that the employee obtains the agreed net, regardless of tax codes and any other factor.
b) It is the employee who pays tax and NI via their gross not the employer
c) A personal tax refund is just that regardless, whether it be a gross or net system used.
d) They receive tax benefits in other areas such as my personal tax allowance and on the amount they have paid out, ie, higher business costs, lower profit therefore less tax so surely HMRC would not have a policy where a business could claim tax benefit then get the sum back from employee that they have had tax benefits on.
Could you inform me if I am correct or if I am missing something here and THEY are correct.
Thankyou, Rick.

Can you give me a little more detail as to the arrangements that are in place please. Are you working abroad under the tax equalisation system? What was wrong with the tax code?
Customer: replied 2 years ago.

No I am working in the uk and a uk citizen, I was on an emergency tax code I think, my p45 was asked for initially but I forgot and my employers didnt follow it up


Whilst there is no legal obligation that I am aware of for you to make over the tax repayment to your employer, there is probably a moral imperative in some situations. The agreement with your employer may have a clause which states that the employer will settle any underpayment on your earnings (this may give rise to a taxable benefit) and so thinks that it should work in reverse.

Unless you have signed an agreement to reimburse your employer where a tax code was wrong and which has benefited you (bearing in mind you as the taxpayer not your employer and not HMRC) are responsible for ensuring your tax code is correct) then your employer has no legal recourse as far as I can see but I'm not an employment lawyer.

a Agreed but it is possible and I've seen it done for an employee to manipulate their tax code in such a way as to get a tax repayment at the end of the tax year.

b Correct.

c Correct.

d Correct, though the personal allowance is yours not your employers', albeit that allowance affects your tax deductions.

You may pay personal pension contributions or make gift aid donations on which you get higher rate tax relief at the end of the tax year. Your employer has no right to that tax relief.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

given i wouldn,t know how to manipulate the tax code what other situations would there be a moral imperative I was on net system I was not aware of problem with tax code, would my employers not of been able to pick up that they were paying a higher amount, ie, put simply, if your car is using more fuel than normal you get it fixed but cannot then go to the petrol station and ask for a refund on the extra you have had to put in, just claim vat and take the rest as a learning that a fair analogy??

By moral imperative, I was referring to manipulation of tax codes. I know of a case where the employee told HMRC they had a company car which was not true and got a tax repayment at the end of the tax year. The employer simply didn't pick up on the low tax code, probably because it employed over a thousand people.

Without knowing what the problem with the tax code was I cannot really comment on why it was missed by your employer.

Tax errors can be be put right and tax overpaid reclaimed so the analogy with trying to claim a refund from the fuel station doesn't quite work for me but I see what you are getting at.

I've looked into this a bit more since I answered your question and as far as HMRC are concerned, your tax and NIC deductions do not belong to your employer and any tax refund is yours, even in the circumstances under which you are paid.

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