The adverse publicity surround the under and overpayments of tax to HMRC as a result of changes in computer systems has its roots in out-of-date systems. Adrian Hobbs provides some expert insights.
In the summer of 2009, HMRC started work centralising the pay and tax information held on 12 regional databases onto one national database, along with National Insurance records, called the National Insurance and PAYE Service (NPS). HMRC hoped that NPS would help them more quickly reconcile taxpayer’s sources of income and earnings; a real headache when people have multiple jobs and/or change jobs frequently.
The problem is that the transfer and amalgamation of employment tax data onto NPS took longer than expected and threw up around 9.3 million records potentially at risk of error along with numbers of problems with coding notices for the start of the tax year 2010/11, all of which needed time to resolve.
As a result, tax records from the tax year 2008/09 were not reconciled and have only just started to be brought onto NPS and resolved from August this year, along with tax records from 2009/10. This now means that employees who thought they’d paid the right amount of income tax during either or both tax years may well find they still owe tax. Even more importantly, what about all the numbers of taxpayers who overpaid income tax and are due a repayment? HMRC reckons that there are up to seven million potential over and underpayments from 2008/09.
How will someone know if they’re affected?
From the weekend of 4 September, HMRC started sending out tax calculation forms P800 to taxpayers they reckon had paid too little or too much income tax for the tax years 2008/09 and 2009/10. HMRC expects to have issued forms P800 to all those who it calculates have under/overpaid income tax by the end of January 2011[1].
A report into the HMRC accounts to 31 March 2010 reported that there were some £132m of underpayments and £238m of overpayments for the tax year 2008/09.
HMRC has stated that repayments for 2008/09 and 2009/10 will be made in full. Those owing £300 or less for the tax year 2008/09 will not be charged. Those owing less than £2000 will be given the opportunity to pay what they owe through the PAYE system in a subsequent tax year. Those owing £2000 or more will have to pay within 30 days of the payment notice being issued; although HMRC has promised to be considerate of those who have real payment difficulties, perhaps entering into time to pay arrangements.
Unfortunately, there are still an estimated 18.2 million unreconciled cases from 2007/08 and previous tax years affecting some 15 million taxpayers! Many of these taxpayers will also not yet be aware that they too have overpaid income tax and are due a repayment or, where they have underpaid, that they have tax needing to be paid some day. The report reckons that the amount of income tax in question could be as much as £1.4bn. These earlier tax records will all have to be reconciled manually.
Matters were not helped by Dave Hartnett, permanent secretary at HMRC, who didn’t see any need to apologise for the delays and errors in processing millions of taxpayer's records when interviewed on September 11 on the BBC4 programme Money Box Live. He said we should all expect delays just as many revenue authorities in other countries do who reconcile tax records once a year. The chancellor made him apologise the following day, as did the Treasury select committee which met with the top three HMRC executives, including Hartnett, on 15 September.
What does the future hold?
At the end of July, HMRC published a discussion document on proposals to improve the PAYE process. Their first proposal, which seems to have garnered quite a bit of support, would see employers send electronically to HMRC each payday an employee’s gross pay and the amount of PAYE income tax, Cass 1 NICs, and student loan deductions. One way of doing this would be by using the BACS system at the same time that an employer initiates payment into employee’s bank accounts, although many would prefer using an alternative channel similar to that used by employers submitting payroll year-end data to HMRC.
The benefit for HMRC is that it would very quickly obtain ‘real-time information’ on employees’ employment income and would be able to start reconciling tax records in real time rather than some months after the end of the tax year. Correct and timely tax codes would therefore be issued more quickly and delays in settling tax debts avoided. The benefit for employers would be reductions in end of tax year reporting and maybe the end of submitting forms P45/P46. However, many payroll professionals have yet to be convinced that HMRC has the ability to set up and operate a sufficiently robust system to allow real time information to work effectively for all concerned.
Another proposal HMRC is considering is ‘centralised deductions’. This would require an employer to arrive at an employee’s gross pay and to send this information to HMRC who within the payment cycle, would centrally calculate the PAYE income tax, Class 1 NICs and student loan deductions before paying the net pay direct to employees. The advantage for HMRC would be the correct calculation of income tax against all of an employee’s sources of earnings or employment income. This proposal has proved very unpopular; there are just too many negatives for employers. It is hoped that the notion of centralised deductions will be squashed, or if it does go forward for further consultation, that it will not be discussed until real time information has a real chance to prove its worth.
[1] See also ‘ Appeal Success unlikely for victims of HMRC tax code blunder’ in The People Bulletin, 8 September 2010.