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Is your employee guilty of fraud?

Is your employee guilty of fraud?

April 2016 saw some of the most significant legal changes to impact payroll operations and software. I would venture that this year’s new changes have been some of the most impactful yet, more so than the introduction of Real Time Information(RTI). New requirements for Scotland including the Scottish Rate of Income Tax and changes to Earnings and Maintenance Arrestments. A revolution in national insurance with the removal of Contracting out and Under 25 Apprentice NICs being introduced. The list can go on.

Changes introduced from April 2016 to Direct Earnings Attachments (DEA) may just give away that an employee has been guilty of fraudulent activity!

The Welfare Reform Act 2012 introduced the concept of the Direct Earnings Attachment (DEA) introduced in April 2013. This new DEA gave power (on behalf of the Secretary for State) for the Department for Work and Pensions (DWP) to issue notices to employers to make compulsory deductions from an employees pay. These DEAs are applied to recover outstanding debts owed to the DWPas a result of overpayment of benefits or recoverable advances or loans given to individuals. They are a measure of last resort as DEAs are only issued where the debtor has failed to engage with the DWP’s Debt Management Section and have not made an acceptable repayment offer.

Unlike Attachment of Earning Orders AEOs or Scottish Earnings Arrestments (EAs), the DWP does not have to go through the courts to apply this type of order on an employer, and there is no choice but to apply them. The law associated with DEAs formed part of the Social Security (Overpayment and Recovery) Regulations 2013 which came into force on 8th April 2013 and applies to England, Scotland and Wales. Local authorities additionally have the power to also use DEAs where there has been an overpayment of housing benefits that needs to be recovered as one of the last resorts.

Since the introduction of DEAs, Ministers decided that where an overpayment of benefit was as a result of fraudulent activity, that the debt should be recovered at a higher rate than those that arose due to a genuine mistake or change of circumstance by the benefit recipient.

As a result of the Social Security (Overpayment and Recovery) Amendment Regulations 2015 [SI 499/2015] legislation was passed in early 2015 giving further powers. From April 2016, a new higher DEA has been formerly introduced which entitles the DWP to apply a (close to) double deduction (the new Higher DEA). The issuing of the order may just have passed some information to the employer that tells them more about their employees than they wanted to know.

The new higher rate of DEA only applies to a person who has successfully been prosecuted for the offence which led to the overpayment of the benefits. So what will employers think about that?

Additionally the regulations provide some clarifying relaxations to relieve elements of the employer burden. The original regulations required the employer to issue a notification to the employee about the deductions from their pay, but the government now accepts that in reality the payslip fulfilled the intention and the regulation have been amended to reflect that position. However, the employee continued to retain the right to request a full written explanation of how the DEAhas been calculated.

So the new regulation introduce two new tables and require the employer to operate the relevant rates applicable to the type of Attachment. New notices from the Secretary of State will make it clear if new higher rate tables are to be applied. The number of higher rate DEAs is not expected to be greater than 1% of all DEAs issued. Although the legislation came into force from April 2015 (last year), none have yet been issued as the first DEAs using the higher rate are being implemented from April 2016.

With the exception of the lowest earnings band, the higher rate tables deduct twice the amount of the normal tables. The lowest higher rate percentage is set at 5% as opposed to nil deduction rate in the standard tables. The employer continues to be entitled to deduct £1 for the administration of the DEA when a deduction is applied.

So employers have a new layer of statutory deduction to contend with, the Higher Rate DEA.

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About the author

Simon Parsons
Director of Payments, Benefits & Compliance Strategies

Simon has been a major contributor to SD Worx’s payroll expertise since 1984. Besides being influential in the development of SD Worx’s payroll services, he is a major presence on a number of HMRC consultative groups and committees.

A fellow of the Chartered Institute of Payroll Professionals and one of the original Masters of Science in Payroll Management, Simon is a regular author and speaker on payroll matters. He is also Chair of IReeN, the electronic exchange with government user network, and the Honorary Chair of the British Computer Society (BCS) Payroll Group (The Chartered Institute for IT). 

Simon has won a number of awards in the past including the Strathearn Award for Lifetime Achievement at the 2012 Pay & Benefits Awards, the Payroll Alliance Award for Advancing the Payroll Profession in 2010 and IPP Person of the Year in 2006.

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