Ongoing battle with HMRC on tax credits overpayment

crispy116

I am about 9 months into a battle with HMRC where they are trying to claim back from Tax Credits from 2005-2006.

This is not as straight-forward as some of the complaints that people have had in this area, so I wanted to try and get some feedback from all you smart people.

At the time, I was not earning a salary as I was trying to get a new business off the ground. My wife started on maternity leave and then went back part time. Throughout this process, HMRC were kept up to date and the annual income was expected to be £8600.

However, that is when it got complex.....my wifes company were taken over, which triggered the automatic vesting and sale of share options that she had.

The company then made the gross error of stating these sales proceeds as income on the salary slip and P45 (she left soon after). Everybody at the company was up in arms about this incorrect statement of earnings and the fact that people might end up paying tax twice....there were several meetings about it, but the company basically said, tough - we did it and we are not going to change it.

This meant that according to the paperwork from employer and HMRC, she ended up 'earning' £35,600.

However, this was not salary.....and tax credits are based on salary, not any other source of income (otherwise they would need to know all about your bank accounts, ISAs, PEPs etc.....)

I have told HMRC all of this information and they just keep sending out template letters - you told us your income was going to be 'x' - it turned out to be 'y' - you owe us lot's of money.


So now, not only were we overtaxed on the share options, but HMRC want money back too.......

Does anybody have any advice/opinion on this issue??????

Murdina

Ermmm I think your company were quite right to have included the share options on the P60 - unless of course they were non taxable. This is normal procedure with taxable options unless the underlying shares cannot be traded easily ie you cannot turn the exercised option into cash easily (and the company would be in breach of PAYE regulations not to do this). Were they taxable or not?
It does beg the question as to whether or not options are income for tax credit purposes and I do not immediately know the answer to that. I would however have thought that, absent a specific provision saying they are not, taxable options are income for tax credits. Look at http://www.hmrc.gov.uk/manuals/tctmanual/TCTM04110.htm
A very quick reply sorry.

BoGoF

I think you are wrong in saying that a tax credit award is based solely on salary. There is a £300 disregard for such things as interest etc but these things are taken into account when calculating the award.

If the compulsory exercising of the share option was considered to be "non tax-favoured" i.e. it had not run it's minimum term, usually 3 or 5 years then the employer was correct to operate PAYE on the share option and show it on the P45. It is certainly taxable income as far as income tax is concerned and I have been unable to find anything on HMRC website to say a taxable share option gain is excluded from a Tax Credit calculation

Murdina

The consensus seems to be bad news. Can I make one more point though. If you do think that the tax credits people are mistaken in treating the share option exercise as taxable, you need to make an appeal to deal with this ie do not go down the route others have with overpayments (as most of these are due to mistakes on part of HMRC, not an underlying technical argument). You would then need to be ready to go to commissioners so would need evidence as to why option not to be included, letter from employer saying exactly what is on P60 etc. I think the appeal form is TC623. However, taking into account what I and BoGoF say above, first step is to check out the exact details of the share option exercise and whether or not it is taxable as income on exercise. Please don't overlook BoGoF's point that even favoured options in so called approved schemes can still be taxable if exercised too soon (or too soon since last exercised). And in my experience sadly don't assume the employer understands it all. It's a difficult area all round. Good luck.

System

Can I just point out that the staff who deal with overpayment disputes have no training in taxes/share options etc unless they have transferred in from that area of HMRC.

I agree with Murdina and BoGoF, you need to clarify things with your wifes employer and then if you intend to ask for a review go through the commisioner or your MP. Good luck:o

Trafficcone

If the shares and options were paid in with the P45 statement then this will be counted for Tax credits, it is the same as interest from shares over £300, company dividends and income from property, so it's not just salary that is counted, if the company are refusing to change the P45, then as much as you may not be happy about it, you recieved the extra money from the shares and this has led to an overpayment

CIS

Even if the figure was taken off the P60 then the extra income would still only be £300 less than it would be if it was shown on the P60 after allowing for the disregard.