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Coding out of tax underpayments

As a practice we have recently seen a few cases where clients underpayments in their tax codes have been removed by HMRC and replaced on their statement of account with one month to pay.

In these cases HMRC have said that there is not enough income from which to collect the tax owing but this is not always correct.

In the latest case, we have had a letter back from HMRC stating "I am unable to code out the underpayment as requested as the PAYE system will not allow me to code out underpayments that would double your client's liability under PAYE". They then suggest our client (owing c£600) contacts Debt Management for time to pay.

Firstly, I do not understand HMRC's position here - is what they are saying correct?

Secondly, whilst all this is going on our client is being chased for the debt and (as she was worried) did ring HMRC to see if she could pay by instalments and they refused - this despite them originally coding out the tax owing (as they have done in the past) and then removing it!

I'm bewildered and frustrated (as usual when dealing with HMRC) and not quite sure what to say to the client next apart from arguing further with HMRC that if they don't reinstate the underpayment in the code that they must give her time to pay.

Any thoughts/advice please?


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11th Mar 2011 11:15

Coding out underpayments

The most common reason for HMRC to refuse to code out an underpayment is that would  exceed the PAYE rule that the tax deducted through a PAYE Coding adjustment must not exceed 50% of the gross pay.

This means that a low paid employee or pensioner with underpayments will quite often encounter this problem.

Just request HMRC for a delayed payment schedule under "Time to Pay" and if refused, tell HMRC your client will go to court and offer £10 per week in settlement, which any court would probably accept on a £600 debt. That puts HMRC between a rock and a hard place. That little trick was one taught to us by Cymru_Draig which I find a useful bargaining chip.

Thanks again C_D!

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11th Mar 2011 11:28

Yes but......

Thanks for the response but in none of the cases will the total tax deducted be more than 50% of the gross pay so I'm still not convinced by their argument!

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11th Mar 2011 11:36

Okay - if it isn't refused because of Gross Pay, is it because o
31 January: online returns

If you send your tax return online, it must reach HMRC by midnight on 31 January.

The deadline is earlier if you owe tax of less than £2,000 and you want HMRC to collect it by reducing your Pay As You Earn (PAYE) tax code next year. In this case you need to send your tax return online by 30 December instead. HMRC will try to amend your code number, but it's not always possible, and you may still have to make a payment instead by 31 January.


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11th Mar 2011 11:52

50% increase in liability

I'm waiting for HMRC to call me back at the moment.  My client has the income to pay an additional £1,500 through her tax coding but HMRC have said that as her liability will more than double, she has to pay in a lump sum.

I have found this in their manual but I have asked them to quote me the legislation.

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11th Mar 2011 12:05

It's only in the PAYE manual

"In the latest case, we have had a letter back from HMRC stating "I am unable to code out the underpayment as requested as the PAYE system will not allow me to code out underpayments that would double your client's liability under PAYE".

The problem with the above statement is that there is no statutory basis for it . It's only in the PAYE manual at PAYE98005:

Checks made for coding

Coding checks will be done automatically by following existing processes and will use the values held to check that

The outstanding underpayment to be included in the code does not exceed £1999.99The outstanding underpayment to be included in the code does not cause the tax liability to doubleThe outstanding underpayment to be included in the code does not cause the tax liability to become more than half the estimated payA live employment existsPotential underpayments will not be included in the code at annual coding where there is a current live SA link

There's nothing in the regs or statute (that I can find) that refers to the 2nd bullet point.


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11th Mar 2011 12:11

With Rammstein

I've done the same. HMRC have referred us to their guidance, but not the legislation. Makes a mockery of 1) having a K code, and 2) having a rule that says send your return by 30 Dec and we'll code out the underpayment.

I can accept it where the source is so small the underpayment would be come stranded, but most of these are pefectly collectable on a £6,000 salary.

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11th Mar 2011 15:50


Thanks for your helpful comments.

I was considering asking HMRC to quote the relevant legislation in my reply and will now do so. All usual critrea were met to have the underpayment coded out and where it is quite possible to do so and collect the tax due I fail to see why HMRC should remove an underpayment from a tax code and insist on payment.

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11th Mar 2011 15:59

Now coded again

HMRC have phoned me back, they can't find the legislation and are going to reinstate the underpayment in my clients tax code.  Unfortunately they can't do it from their office and are contacting the service office to deal with it so it's still not 100% sorted.

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11th Mar 2011 16:27


This has been discussed recently:

My hunch is that ESTINC may also be an issue here, as I believe that is what this 'double the liability' nonsense is based on. You could always try telling HMRC that ESTINC is £30k, say...


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12th Mar 2011 23:00

It's with our AWEB Working Together discussion group

I did (as promised) raise this as an issue on the AWEB Working Together discussion group on 15 February.  It's the one entitled Underpayment coding restrictions - what to do?

For those of you who are not yet members of this discussion group and so won't be able to view the thread, Rebecca's latest response on this particular point, posted on 5 March is:

"Reply from our WT rep:

This issue has been raised at a high level with HMRC and there is a team looking at the issue. HMRC states that this practice has been in place for many years; I suspect that the reason it is such an issue this year is that NPS is now applying the practice across the board, whereas previously the coding out may have been done manually and the practice not applied consistently (if at all).

There is no statutory basis for this as coding out is itself non statutory.

We shall get more information soon (hopefully within weeks) about what HMRC's plans are in this regard.  I guess the best solution is to allow the taxpayer to decide whether he wishes the tax to be coded out or not, irrespective of the "doubling" practice, but of course this may necessitate and IT change.  It is clear that this does affect a very large number of taxpayers and their agents.  At least we may be able to get this subject to a manual over ride, but of course that does prompt extra contact."

We are, therefore, still waiting for the final official answer on this.  It is interesting that Rammstein's feedback indicates that it can be reinstated.

Kind regards


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24th Dec 2013 08:47

Any flexibility with HMRC?

Has anyone managed to get HMRC to over-ride their guidance that "When reviewing the tax due for the year do not more than double the customer’s liability by including collection of an underpayment."? Is anyone aware of any changes in policy / flexibility?

With the personal allowance being increased, this means that those on low incomes who pay very little tax will regularly be asked to pay any underpaid tax in one lump sum.  Precisely those people that can least afford to and who would benefit from coding out.  This all appears extremely unreasonable given the policy objective is "To protect you from paying unreasonable tax deductions"


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