Audit report uncovers PAYE coding fiasco
The scale of HMRC’s difficulties in introducing a new system to manage PAYE codes has emerged in an appendix to the department’s 2009-10 accounts.
A report prepared by the Comptroller and Auditor General to accompany the annual HMRC accounts (2.7MB PDF) devotes several pages to the problem, and estimates that if 18.2m unresolved “open” cases are taken into account, a net figure of £1.6bn in repayments may still be outstanding going back to 2007-08 and preceding tax years.
There has been some controversy in recent weeks over the decision not to publish a full annual report for HMRC. In the government’s view, dropping the annual accounts would save money and was not necessary because many of the targets on which they reported related to initiatives that were no longer relevant. The CIOT’s John Whiting, Grant Thornton’s Mike Warburton and PKF’s John Cassidy all complained to The Observer about important information for departmental transparency and for tax advisers that would no longer be available.
As in previous years, the NAO has qualified its audit report with regard to Tax Credit errors and fraud. In 2009/10 the department paid a net £27.3bn in Child and Working Tax Credits, and estimates that error and fraud resulted in incorrect payments of up to £2.27bn, 8.3% of the total.
But for long term students of HMRC’s IT disasters, the Auditor General’s report gives an insight into the problems that continue to plague the department’s computing infrastructure. The problems with the PAYE system have been evident for years, and paved the way for a major overhaul to standardise numerous separate systems into a single database for employee records.
The National Insurance and PAYE Service (NPS) went live in a phased implementation that started in June 2009, more than two years’ behind schedule, contributing to a huge backlog of PAYE returns and adding millions more erroneous records when mismatched data from 2008-09 employers' returns were added in.
By the end of June 2010, estimated a further 2m records were identified as needing review; along with bulk processing of 2008-09 reconciliations, this work will start this month (August). The department is also undertaking a review of the annual coding exercise to identify lessons learned and further actions not addressed by its recovery programme, the NAO reported.
A spokesman for HMRC apologised for the errors and acknowledged the processing of PAYE returns and coding notices was “not acceptable”.
“The new system raises the bar in terms of data quality and will in the medium term significantly improve overall accuracy, reducing both under and overpayments,” he added. “Our contact centres are able to quickly correct inaccuracies, when contacted by the taxpayer, in part because the new system has for the first time created a single taxpayer record which the contact centre operator can access and amend.”
But all the anguish and half-billion pound costs of the PAYE system upgrade could be rendered redundant within a few years, if the new government’s proposals for reform are put into practice. Rather than trying to reconcile its data with that supplied by employers in their annual returns, HMRC is looking to move to real time information, with the added possibility of taking on responsibility for calculating and deducting tax due centrally in a second phase.
Given HMRC’s lamentable track record on recent PAYE computerisation projects (remember NIRS?), many practitioners have called into question the department’s ability to handle centralised deductions. But perhaps the five-year catalogue by of woe compiled by the NAO encouraged ministers to look at the alternatives.