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HMRC internal manual

Compliance Handbook

Penalties for Inaccuracies: Calculating the penalty: Potential Lost Revenue: Calculating PLR for multiple inaccuracies - employer and contractor issues

You must check the date from which these rules apply for the tax or duty you are dealing with. See CH81011 for full details.

The employer return form P35 contains details of amounts that employers are required to account for under several different areas of legislation such as income tax under PAYE, Primary Class 1 NICs and Student Loan Repayments.

Under the normal rule (CH82270) overstatements are only set-off against understatements to calculate the PLR if they concern the same type of liability and the same tax period.

Overstatements of one type of tax or other liability on a P35 may be set against understatements of another type of tax or liability on the same P35 if the deductions from the employee(s) are correct but transposition of the figures from the P14 to the P35 has occurred and resulted in both the overstatement and the understatement, for example:

P14 figures Tax £200 NIC£100
P35 figures Tax £100 NIC£200

In all other circumstances, except Secondary Class 1 NICs, the PLR is unaffected by overstatements relating to other liabilities, for example:

An employer with less than £45000 NICs due has only reclaimed 92% of the SMP instead of the 104.5% he is due to claim. This results in an overpayment.

On the same End of Year Return he has under-declared Student Loan deductions for one of his employees which results in an underpayment. In this example the PLR is unaffected by the overpayment.

The following links provide more information about the items affected.


PAYE is a mechanism that allows an employer to deduct income tax from an employee’s earnings.

If PAYE is over-deducted, paid in error and accounted for on the employer’s end of year return (P35 & P14s), it is up to the employee to seek a refund from HMRC.

Under no circumstances should an amended employer return be processed to generate an overpayment which is then repaid to the employer.

Primary Class 1 NICs

This is the employee’s contribution. If contributions are over-deducted and paid in error

  • they must be returned to the contributor, or
  • they can be treated as paid on account of contributions properly payable by the contributor.

An overstatement of primary Class 1 NICs cannot, therefore, be set-off against an understatement of secondary Class 1 NICs (the employer’s contribution). There are exceptions to this which require the employee’s consent. For further guidance see NIM37001 onwards.

Secondary Class 1 NICs

This is the employer’s contribution and if they are overstated they can be used to reduce the employer’s PLR for understated secondary contributions in accordance with CH82270.

When such an overstatement is off-set against an understatement on the same return, you should make a note on form ECR304 to alert NICO that gross amount of secondary NIC due has been reduced by the overstatement.

In any cases of doubt consult Central Policy, Tax Administration Advice.

Class 1A NICs

Class 1A NICs are an employer-only liability due on benefits provided to employees. Any overstatement of Class 1A NICs on return form P11D(b) cannot be set-off against other understatements on the form P35.

Statutory Payments

There are four categories of Statutory Payments. All are treated as earnings for Class 1 NICs purposes. They are

  • Statutory Sick Pay (SSP)
  • Statutory Maternity Pay (SMP)
  • Statutory Adoption Pay (SAP)
  • Statutory Paternity Pay (SPP).

Even though an employer is allowed to recover the amounts paid to employees from PAYE/NIC due to HMRC and account for this on the form P35, there may still be an overstatement. Such situations should be fully investigated in accordance with guidance in the Statutory Payments Manual (SPM). You should not set any overstatement off against any understatement that is evident on the return form P35.

Collection of Student Loans

The return form P35 may show that the employer has made an over-deduction of student loan repayments. Any over-deduction is allocated against the employee’s (the borrower’s) student loan account and reduces the balance outstanding. If the borrower asks for a refund of the amount overpaid this will be made direct to the individual by the Student Loans Company. No refund will be made to or can be made by the employer. It follows that you cannot accept any employer claim that an overstatement arises.

Construction Industry Scheme deductions

A contractor who engages subcontractors and is required to make deductions from payments made under the Construction Industry Scheme (CIS) is also required to submit monthly returns on form CIS300. Deductions included on these monthly returns and paid over to HMRC are accounted for at the year end through BROCS, see CISR69010 onwards for further details. This is an accounting process only and the relevant returns are the forms CIS300.

CIS deductions are made on account of the subcontractor’s income tax (and in certain circumstances Class 4 NIC) liability. You cannot accept any claim to set an overstatement against an understatement by the contractor.

In any cases of difficulty you should contact Central Policy, Tax Administration Advice.