HMRC tackles PAYE error backlog

Mainstream media have been delving into HMRC’s accounts for 2009-10 to highlight the scale of tax calculation errors during the past few years.

Both The Guardian and The Telegraph have given extensive coverage to the 18.5m open cases highlighted in the annual accounts. At the time the accounts were published, the NAO estimated that the backlog could result in tax repayments of £3.0bn and underpayments that would need to be collected from tax payers amounting to £1.4bn. According to weekend reports, the figures are closer to £2bn for underpayments from employers and £1.8bn in overpayments.

The NAO report on the department’s accounts provide a detailed commentary of how the PAYE system broke down, and the extra backlog that resulted when HMRC introduced its new NPS system to handle PAYE processing.

In a comment on PublicTechnology.net, an HMRC official explained,  “The roots of this are in the fact that PAYE came in during the Second World War in 1944, at a time when many people stayed with the same employer during the whole of their working lives. It’s not like that anymore.

“We have to reflect that and have new systems. Because circumstances change during the year there will always be a minority who have paid either too much or too little. This year, and going forward, the new IT system will mean more people paying exactly the right tax at the right time than ever before.”

Speaking to The Guardian, ICAEW Tax Faculty manager Anita Monteith said that those taxpayers whose underpayments were the result of HMRC errors when calculating their tax codes manually would not have to pay up.

“HMRC can agree to give up collecting an underpayment if they had the right information to calculate tax deductions and did not use it when they should have done,” she said.

The discretionary exemption is available under HMRC's Extra Statutory Concession A19, under which the department can give up claims to income tax arrears if they result from its "failure to make proper and timely use of information".

Further reading
PAYE error backlog: Fasten your seatbelts by Simon Sweetman
Audit report uncovers PAYE coding fiasco
Any Answers: Another scandalous example of gross incompetence
More PAYE coverage on AccountingWEB.co.uk
 

Comments
billgilcom's picture

ESC A19

billgilcom | | Permalink

I would anticipate that most of these applications will receive the intial response "it was not reasonable for you to think that your tax affairs were in order" - so there pay up and put the monies in to the exchequer so that we can waste it somewhere else.

Just call me an old cynic

hmrc customer service

fgb1973 | | Permalink

You can't help being cynical.

My favourite common hmrc response is "ignorance is no excuse".

Ignorant and unreasonable, I wonder how long our business would last if we used these terms to describe our clients?

1944 till now

Mike Carter | | Permalink

In 65 years HRMC failed to notice that sometimes people move jobs or have two jobs and that maybe PAYE should cope. The mind boggles!

PAYE debacle

simsonj | | Permalink

Will the penalty regime be suspended where HMRC are proven to be at fault?

Robin Dillamore's picture

Anita has a point

Robin Dillamore | | Permalink

I believe Anita Monteith made a very valid point in her comments quoted in the Guardian, and that taxpayers will be able to refer to this article in their dealings with HMRC.  Personally, I will not be taking a cynical or resigned approach, but will encourage any taxpayers I represent, who may be affected, to quote Anita's comments if HMRC decide to pursue a repayment.  In view of the amount of adverse publicity they have received over this, I am not convinced that HMRC will want to generate further bad feeling by pursuing millions of taxpayers for underpayments, which they have admitted were caused by their own errors.

bookmarklee's picture

Big fuss over PAYE system getting things right at last?

bookmarklee | | Permalink

The mainstream media seem unable to work out how to report this story.

At first it was bad news that taxman would be chasing 1.4 million people for underpayments

Then that 4.3 million are due refunds (incidentally, many of the 5+ million owed money from earlier years are the same as those owned money for the last two years).

Then that the taxman would be asking for instant repayments - when they will simply be adjusting next year's codings to spread the liability over 12 months from April 2011- March 2012. ie: Doing what they've always done as the PAYE system isn't perfect.  Even the radio journalist I spoke to today had to admit that was fair - if the tax is owed. The taxman's letters are simply calculations giving taxpayers the chance to check things.

I've written more about this and tried to unravel the fact from the fiction on the TaxBuzz blog.

Mark

Ther3e could be a sting in the tail

geoffwolf | | Permalink

for professionally represented taxpayers who owe tax. Concession ESC19 does not normally apply to such taxpayers. However one would hope that there are very few professionally represented taxpayers in that situation bearing in mind ICAEW, ACCA and CIOT ethics

Robin Dillamore's picture

Re: Sting in the tail

Robin Dillamore | | Permalink

I agree with Geoff Wolf's comments.  However, there may be people who have not been professionally represented - including some who have been taken out of the tax return system in the last few years - who decide to seek professional assistance now to ensure they are being assessed for the correct amount of tax.

Gina Dyer's picture

Comments from around the profession

Gina Dyer | | Permalink

We've had lots of comments through about this, so I'll include a few of them below: 

David Whiscombe, partner, BKLTax, and member of UK200Group tax panel
“While it’s always popular to knock HMRC for getting it wrong, this isn’t what’s happened in this case.  The simple fact is that the PAYE scheme was never designed to cope with the complexity of today’s tax system.  It’s been failing to do so for years and the systematic errors reported over the weekend aren’t new, it’s just that the introduction of a more sophisticated computer system has brought them to light for the first time.

“The question to ask is not ‘why does HMRC keep getting it wrong?’ but ‘how can we simplify a tax system which is collapsing under the weight of its own complexity?’.  The first step has been taken with the creation of the Office of Tax Simplification, to whose deliberations the UK200Group is delighted to be contributing. The opportunity it offers to give us back a tax system which works must not be wasted.”

Anthony Harris, director, Critchleys
“Let’s take a positive look at this. HMRC have identified the issue themselves, albeit after an internal review. Normally in the past these issues have had to be discovered by the odd million tax payers who individually query their codings and are individually dealt with by Revenue officers.

“I do not condone the errors, but I am really pleased to hear that HMRC’s own systems have brought these to light and they are getting on and rectifying the issue in bulk without days and days of individual review of so many accounts being needed. In fact this is progress and should save HMRC costs in the year ahead.”

Will Abbot, partner, Randall and Payne
“The PAYE system was only ever designed to give an estimated tax deduction, which in most cases is fairly accurate, with the under or overpayments being corrected in later periods.

“In recent years HMRC has tried to remove people from the self assessment system by making more use of the PAYE system than it was ever intended for. So, for example, estimated amounts of private pension income, or savings income have been included in the codes. Finally, HMRC has been using the coding system to collect estimates of tax due on income such as property rent on a monthly basis, rather than collecting through the self assessment system.

"Of course interest rates have changed significantly over the past couple of years, so it is perhaps no surprise that these estimates are wrong. If you then add into the mix the changes in people’s circumstances, the deficiencies of the system are highlighted.

"However, I think the current furore over the system is what the Coalition wants to hear. It will strengthen their case for reforming the system, and I believe we are heading towards employers submitting monthly PAYE returns online, as already happens with the Construction Industry Scheme. This may lead to improved cashflow for the Treasury, as it is currently possible for employers to defer payment of some of the PAYE deductions until after the tax year. Would the Coalition go a step further and amalgamate national insurance and income tax into a single rate, in the name of simplification?

"It goes without saying that if individuals are concerned about their tax position, they should seek advice from a qualified accountant."

Jonathan Russell, partner, ReesRussell and vice-president UK200Group
“Whilst not being surprised as mistakes do happen it does seem to be one rule for the tax payer and another for HMRC. If HMRC had been provided with the correct information at the right time and in the right manner should it not be expected that they would handle it correctly?

“Under self assessment there is a general rule that the taxpayer should be aware and pay the correct amount of tax regardless of what is requested but for people who are on PAYE there is the presumption that if the correct information has been supplied the tax collected will be correct.  It will be interesting if HMRC try to collect penalties under the new regime – after all, they would under the current rules be entitled to do so.”
 

cymraeg_draig's picture

Fine words - but misguided

cymraeg_draig | | Permalink

Gina, all the comments you quote are interesting  - but no use to innocent taxpayers, many of them pensioners, who trusted HMRC and had no reason to believe that they were being undertaxed.  Now they suddenly find that they owe £1,500 ? 

However it's wrapped up the bottom line is that this is just another disgraceful episode in the appalling record of HMRC over the last few years. 

We will certainly be vigorously opposing any demands we are asked to deal with and I would hope that other accountants will also help to protect the more vulnerable from this daylight robbery.  And no - we will not be charging pensioners and those on low incomes for our services - I don't see this as an "opportunity" to make money, I see it as a duty to put something back into the local community.

Gina Dyer's picture

Updates

Gina Dyer | | Permalink

The comments on this topic keep pouring in. Today, we received an update from George Bull, head of tax at Baker Tilly, who offered the following insights:

People could be waiting until October 2012 to be notified:
“Will I hear from HMRC this week? Only if you’re one of the “lucky” 45,000 in the first batch. HMRC has a lot of letters to send and at the rate of 45,000 per week it would take until October 2012 to send out all 4.7 million letters. HMRC expects to have sent all the letters by Christmas (this year!). So if you haven’t heard yet it’s probably worth checking now whether you have overpaid tax.”
 
People who have overpaid should check their tax records:
“HMRC has only checked 2008/09 and 2009/10 but if you’ve overpaid tax you can claim back at least as far as 2006/07 and may be able to claim back as far as 2004/05 in certain circumstances. Four years is now the normal time limit for reclaiming overpaid tax but people who were not sent tax returns for 2004/05 or 2005/06 may claim back tax overpaid in those years as well.”
 
HMRC computers are to blame: 
“HMRC official instruction PAYE 96201 makes it clear that, if the recalculation of the 2008/09 and 2009/10 PAYE underpayment reflects five or fewer factors, then the computer will simply churn out the P800 calculation which will be mailed to the individual without human checking.  To those who think that the management of the HMRC computer system got us into this mess in the first place, that’s not good news.”
 
Be wary of tax scam emails:
“Equally unwelcome is this morning’s fresh flurry of tax scam emails with fraudsters apparently trying to obtain personal bank information from people who might be entitled to a PAYE repayment.  HMRC has made it clear that it will not be contacting people about rebates or tax owed either by email or telephone.  Nor will it ask for bank details.  If you received an email which you think may be fraudulent, the HMRC website provides guidance on what to do.
 
Low-income groups likely to be worst affected:
“In his recent statement David Gauke, the Exchequer Secretary to the Treasury, explained that the Treasury simply could not afford to forgo collection of the unpaid PAYE tax totalling some £2 billion.  With the dawning realisation that most of the PAYE underpayments are likely to relate to low-income individuals with two or more jobs, there have been calls for HMRC to exercise the discretion afforded to it by statute and to take a sympathetic view of individual circumstances.”
 
Problem stems from self-assessment:
“Those in the 1.4 million who are about to receive tax demands will wonder what else they could have done.  Most will have reasonably assumed that, because all their income was received after deductions of income tax and NIC via the PAYE system, HMRC already had all the information necessary to get their tax right. 
 
“However, technically, HMRC has both right and might on its side.  While the current campaign to claw back around £2 billion follows HMRC computer and procedural failures, the roots are to be found in the introduction of Self Assessment in 1995/96.  Even when Self Assessment was being introduced, tax professionals warned that unrepresented taxpayers were being exposed to the risk of under- or over-paying tax.  Those warnings have now come home to roost with a vengeance.” 
 
Welcomes the return of year-end checks:
“At first HMRC announced that it would not take any action to try to identify the cases where incorrect coding notices had been issued. Now, clearly the decision has been taken that the newly available computing power should be used to identify those cases where the PAYE coding system has fallen down as well as those for which the system cannot be expected to get it right: PAYE coding adjustments are often based on estimates of items such as benefits in kind, investments and other income, as well as deductions such as gift aid. There will always be the need for a year-end check to be made by somebody, either HMRC or the taxpayer.
 
“That HMRC has decided to institute a system of year-end checks should be seen as a welcome return to acceptance of responsibility on the part of officialdom. Assuming that annual reviews are here to stay, even in their current imperfect form, at least taxpayers will have a chance of catching up and getting their tax affairs in order.
 
“However, the problem does not stop with the latest two years. HMRC’s estimate is that the total amounts underpaid in 2009/10 are not significantly different from the total amounts overpaid but the coding fiasco of 2009/10 will have inflated the amounts underpaid. That opens the question whether HMRC was right not to conduct similar checks for earlier years.
 
“And let’s not forget people who have paid too much tax. Taxpayer ignorance and inertia have provided the government with a steady stream of income over the years since 1995/96 and those overpayments are now largely irrecoverable by taxpayers who mostly fall into the lower income bracket.”
 

Within the Threshold

mikewhit | | Permalink

I can imagine a lot of people who owe just over either the £300 or the £2000 threshold, paying the small excess immediately and then claiming themselves to be within the lower category.

Actually that might just work ...!?