HMRC collection of debt: Coding out

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Diana Bruce
Senior Policy Liaison Officer
Chartered Institute of Payroll Professionals
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It is I’m sure, common knowledge, that it has become increasingly important that HMRC collect tax owed in the most effective way possible to ensure that money is available to fund public services, says Diana Bruce of the CIPP.

We have seen the introduction of real time information (RTI) this year which although driven by the new Universal Credit system, is ensuring more employees pay the right tax at the right time.

‘Coding out’ is used by HMRC to recover tax credit and self assessment (SA) debts where the taxpayer has not paid voluntarily. It was introduced in 2011 and is now an established method of debt collection. HMRC assigns a new tax code to the debtor meaning that the normal deductions made from a taxpayer’s earnings by their employer will be increased to include an amount that will pay off the sum they owe over the tax year.

Coding out can also be used where there has been an underpayment of PAYE or an amount owing under a taxpayer’s SA tax return if it is below the £3,000 limit. In these cases, an individual will often be able to pay back the underpayment for the current or earlier tax years through an adjustment to their tax code. The current coding out limit of £3,000 per annum was set in 2011 in order to strike a reasonable balance between allowing HMRC to recover debts, while protecting lower earners. But as it applies to all taxpayers regardless of their incomes, it represents a...

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23rd Sep 2013 19:02

its still too much too soon

these deductions usually as a result of HMRC errors should be phased over at least 2 years

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24th Sep 2013 08:04

Oh, No, it wasn't!

Diana unfortunately gives credence to the statement by the author of the condoc that coding out was introduced in 2011. It has been a feature of the PAYE system for over 50 years! 

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24th Sep 2013 11:38

Thanks 'chicken farmer'....

..... I thought it was just me. I remember a 'coding out' exercise when I first joined the Revenue back in 1976.

Turning to these proposals - will this really help or is it just one more thing to be added to the tables I need to check 20 times a day?

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25th Sep 2013 12:07

A recipie for disaster!

Coding out, while helpful in many cases, often gets untidy as an underpayment  for one year effectively gets rolled in part into another (and another!) thus leaving taxpayers, and often HMRC and advisors, thoroughly confused.

I know that time is wasted on all sides sorting out these situations

I understand the cost saving advantages for the government of collecting debts this way, although HMRC seem sell the idea as some form of largesse on their part. However I suspect much of what's gained is subsequently lost with the extra admin in sorting out the mess coding out creates.

Furthermore coded underpayments can and frequently do get "stranded". That's to say they can't be collected through PAYE because the individual falls out of work or switch to self-employment, which further delays collection.

£3,000 seems a reasonable limit for coding out to me. Anything above this I think should be collected directly. Perhaps to assist HMRC could introduce an automatic scale of time-to-pay deals for PAYE underpayments. This would avoid inconsistent treatment by different debt management offices and reduce the time they spend deciding on whether or not they can allow deferred payment. They could charge interest to make up for having to administer direct debt collection. 

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30th Sep 2013 15:28


YOur last paragragh is a good one and is one that many businesses follow.  It is better to get a regular repayment of tax than to go court only to find the business has to be woulnd up through lack of funds.  Or the self-employed man who loses the will to continue to trade because to continued harrassment by HMRC.  In our office we have seen threatening letters for £100.

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