Nearly 6 million employees have paid the wrong amount of tax through HMRC’s PAYE system. Although 4.3 million of them overpaid and are due a refund (on average around £400 each), 1.4 million of them have underpaid and could be facing a tax demand for an average of £1,428 each. A total of £2bn has been underpaid through the PAYE system over the last two years and £1.8bn has been overpaid.
HMRC has sent out 45,000 letters to the first tranche of individuals affected, some 30,000 of which are due a rebate with another 15,000 found to have underpaid their tax. The remaining 5.7 million will receive letters before Christmas. Those having underpaid, but owing less than £2000 will be able to repay through the coding system during the remainder of the 2010/2011 tax year. However, those owing more than £2000 will have to repay HMRC a lump sum.
The errors date back to April 2008 and affect individuals who notified HMRC of changes in their circumstances which would have affected their tax codes before the start of the 2009/2010 tax year on 6 April 2009. This was as a result of a new computer system being introduced last summer which has meant millions were given the wrong tax code. A manual reconciliation by HM Treasury uncovered the problem after David Gauke, the Exchequer Secretary to the Treasury, asked for the numbers to be checked.
Angela Beech, a partner at chartered accountants Blick Rothenberg told the Daily Telegraph and the Daily Mail that affected individuals should “think before they automatically pay up.” Under tax rules, HMRC must issue demands for underpaid tax within 12 months of the end of the tax year in which it became aware that people had underpaid. If it fails to do this, taxpayers are entitled to ask for an Extra Statutory Concession, known as ESC A19.[1]
She goes on to explain: “if you had given HMRC information that would have enabled them to adjust your tax code to make sure you did pay the right amount of tax, then, if the time limit has passed for them to use that information, they cannot pursue you for the unpaid tax…if you have got evidence or know you supplied that information, then you should consider appealing against the demand to pay.”
An HMRC spokesperson did confirm this: “HMRC can consider writing off the underpayment in certain circumstances. Basically these are if HMRC had been provided with all the information necessary to get their tax right and the taxpayer could have reasonably expected their tax deductions to be right.”
However, David Gauke told BBC Radio 5 Live: “ Of course the government is very keen that everybody who is in a position of having underpaid their tax is treated sympathetically…the issues is not entirely new…our experience is that very few of those appeals succeed.”
Taxpayers have also been alerted to the risk of fraudulent emails offering tax refunds in a bid to obtain bank details, passwords and other personal data.
Mistakes as a result of technology failure at HMRC are not new. Teething troubles with online employer end of year returns caused major headaches for payroll and HR departments when 14,000 unjustified penalty notices, each of £400, were issued to employers that had correctly filed their annual returns by the deadline of 19 May 2007.[2]
An overhaul of the antiquated PAYE system is clearly needed and MPs from the all-party taxation group are in discussions with Treasury ministers about solutions.
[1] www.hmrc.gov.uk/manuals/epmanual/ep6601.htm
[2] www.computerweekly.com/blogs/tony_collins/2007/10/hmrc-slow-to-admit-its-systems-1.html