PAYE overpaid on share issue

Is PAYE paid on the (incorrect) assumption that a s431 election would be made recoverable?

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Hi there

I have a client who works for a large listed UK company.  He was issued shares subject to a 6 month lock-up period making them restricted securities.  He was sent a s431 election to sign, and the employer operated PAYE on the unrestricted market value, on the assumption that the election would be made. 

The client in fact decided not to make the election, so PAYE should have been operated only on the restricted market value.  The employer believes that a 5% discount would be applied for a 6 month lock-up period. 

At the end of the 6 months, the employer operated PAYE on remaining 5% of the then market value.  This is presumably the right thing to do because no s431 election was entered into, so the value arising on the lifting of the restrictions is liable to tax notwithstanding that they operated PAYE incorrectly 6 months earlier. 

Essentially the client has paid income tax on 105% of the value (at different times) of the shares.   The shares decreased substantially in value in the 6 month period so he is left with a capital loss which is only useful if he realises capital gains elsewhere.  Not making the s431 election was the correct thing to have done, if the employer had operated PAYE correctly. 

So... the question is what does the client do?  Should he complete his tax return showing the 95% value with too much PAYE deducted, leading to a refund of the overpaid tax, or is the employer required to correct the payroll, form 42 etc and refund the overpaid PAYE back to the client?   Putting an adjustment through SA will probably raise questions if his numbers don't tally with the RTI/Form 42 submissions (plus he won't get his NIC back), but the employer is saying it's the employee's responsibility to sort it out. 

Any thoughts/advice greatly appreciated. 

Thanks

 

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