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Audit report uncovers PAYE coding fiasco

18th Aug 2010
Editor in Chief (interim) AccountingWEB
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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. The decision to delay the project was made to protect the integrity of the PAYE system, but built up a huge backlog of PAYE returns in 2007-08 and 08-09.

The deferral cost the department an extra £33m and prevented it from realising some £55m of planned efficiency savings during 2008-09 and 2009-10. Further changes, including improved security measures, added a further £78m to the cost of the project. Based on its revised figures, HMRC expects to save around £532m over five years, and to recover its investment of £389m by 2013.

In spite of introducing the new system, PAYE processing errors increased in 2009-10, amounting to £132m in underpayments (a 15.7% increase) and £238m in overpayments (a 148% increase). The department discovered that going live with a high volume computer system that wasn’t adequately scoped or tested was a sure way to foul things up even more.

Before migrating 54.3m live taxpayer records from 12 regional databases into 45.4m employment records on the new database in June 2009, HMRC neglected to validate the integrity of the information, assuming that its new exception processes would be able to correct inaccuracies as the system received new data from employers.

“Eevidence from the initial operation of the new Service suggests that the Department did not fully appreciate the extent of risk from data inaccuracies or its implications for the delivery of PAYE,” observed the NAO report.

The capability to reconcile many of these discrepancies within the new system was not available until the third phase of the project in April 2010, which meant that more than 7m over- and underpayments were unreconciled when it came to run the 2010-11 annual coding exercise. These records will now be processed from August 2010, although it is not yet clear how many cases will clear automatically and how many will be left for manual working.

When the new system encountered an employee that it could not match to existing employment data, it automatically generated a new, erroneous employment record. So many new items were appearing that when HMRC processed 2008-09 data on the system, it exceeded its 12.5m capacity for open items. The 7m work items arising from 2008-09 returns had to be removed from the workflow queue rescheduled for processing in August 2010.

“The Department found that the new service had produced significantly more amended tax codes than expected, with the potential to generate up to 25.8 million coding notices, almost double the amount anticipated. A significant number of the codes generated were incorrect. “

While its computer was churning out coding notices, HMRC only really became aware of the problem as the volume of calls mounted to its contact centres – which peaked at more than 18,000 calls per day about erroneous coding notices.

In January 2010 HMRC put in place a recovery programme to identify and prevent the issue of any further incorrect coding notices to individuals and ensure that corrected coding notices were issued to employers in time for the 2010-11 tax year. At its peak, the department assigned a total of 3,000 staff to the project, including 2,400 who were switched from their usual work supporting personal tax customers.

At the end of June 2010, estimated a further 2m records were at risk and needed review and will begin bulk processing of 2008-09 reconciliation this month. 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.

Rob Durrant-Walker, tax manager at UHY Hacker Young, commented: “Even though HMRC’s new system should lead to more accurate codes in future that can cope with increased job mobility, these figures are quite shocking. We have seen a steady increase in PAYE errors over the past year. For the amount of tax collected in error through PAYE to jump 148% in one year is simply unacceptable.”

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 of woe compiled by the NAO encouraged ministers to look at the alternatives.

Replies (16)

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By mydoghasfleas
18th Aug 2010 11:45

PAYE coding fiasco
Given the pig's breakfast made over coding and the inability to get the tax credit system right perhaps we need to look at the HMRC mission statement - HMRC Purpose, Vision and Way Our Purpose We make sure that the money is available to fund the UK's public servicesWe also help families and individuals with targeted financial support

By getting the employed population to over pay PAYE the first purpose is met, by overpaying tax credits so is the second.

I am still irritated by the purpose.  The only purpose of HMRC is the care and management of the taxation system in the UK.  As so much of the money used to fund public services is borrowed, is it taking over that function at the Treasury.  Also, it is HMG not HMRC that makes the decision on support HMRC is not in the process over who to target.


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By Gentoo
18th Aug 2010 11:59

The solution is obvious....
....based on their vast experience of this PAYE fiasco they can start again with a new project, because all the evidence shows a new HMRC IT system will save money and give a better service.

I hope everyone will be adding this thought to their response to the consultation for a proposal by HMRC to completely screw over PAYE.

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By Stephen_Foster
19th Aug 2010 12:02

Help always available!

One could also add, how difficult it is to try to resolve employee tax code queries with HMRC, half the time you can not even get through!

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By Jekyll and Hyde
19th Aug 2010 12:11

The end full audited disclosure

With the end of the NAO and the task taken into the private section, this will see the end of these full honest disclosure by HMRC.

In future, they will indeed tender for audit business to the big 4, at a perhaps low fee. The Big 4 will do as little as possible in order to sign the audit report and make hugh profits. Hence in future, HMRc can seek to hide more horrific situtations and disclosures within their accounts and if all goes wrong just blame and sue the audits. That is how it has happened with internation PLC's.

Another issue, if an auditor is auditing HMRC, is there a conflict of interest, if they/or a group company deal with tax affairs of the taxpayers that are in effect being audited by that practice?

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By RogerMT
19th Aug 2010 12:23

Communication Breakdown

The idea of HMRC being responsible for calculating PAYE & NIC deductions and then sending net pay to employees is as frightening as it is laughable. On the communication front, I recently spoke to an HMRC employee in a local office regarding a client's incorrect tax coding. He told me that although he had all the info in front of him on his screen, as he was solely involved with P11D dispensations, he was not authorised to make any changes, and gave me the inevitable 0845 number to call. In his defence I would say he sounded as hacked off as I was at this ludicrous situation, and asked me if I would like to lodge a formal complaint, which I readily agreed to. I do not expect, nor have I had a response to said complaint.

Some 45 minutes later I had resolved the client's problem, which meant I had wasted almost an hour of unbillable time on a matter that could have been resolved in under 5 minutes 10 years ago. So much for progress! 

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
19th Aug 2010 12:27

Clarification - Audit Commission, not NAO set for closure

Just to set things right, Chesterfield, the government hasn't yet decided to disband the NAO, it's the Audit Commission which oversees NHS, local government and associated body spending that will be closed down.

There are some intersesting arguments brewing up on our story about that, with some concerned about the resulting consistency and accountability issues, others anticipating more work for accountancy firms, and the Justice and Anti-Corruption Party saying "good riddance".

It took me some time to wade through the NAO report, and I haven't tackled the other 130 or so pages of the HMRC accounts, which may uncover more ugly surprises. But the whole episode made me ponder in an Editor's blog, Why it's a good idea to look at the accounts.

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By sunderland
19th Aug 2010 12:37

End of NAO?

What do you mean end of NAO? I thought it was the Audit Commission that wa being disbanded.

I think you will find the NAo will remain in place and hopefully continue to highlight the disasters that occur when government departments take on new IT systems.

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By peterlashmar
19th Aug 2010 12:39

PAYE coding fisaco and NAO

Sadly a massive new IT system will have the inevitable net result of UK taxapayers sending more billions of pounds to the US with only a tiny proportion being spent in UK.

We have  a personal tax division and the personnel there have been much amused by the PAYE coding notices being sent to us, as appointed agents, in avalanches. The most that we have received for one person is 14 forms P2(new) who actually holds 3 current posiotns of employment and the one with the oldest date of actually leaving the employer for which a code has now been issued seems to be 31 July 2000.

What happens with the "tax office copy" of all the forms P45 that law abiding employers dutifully spend time issuing whenever an employment ceases?



I remember years ago when I was an auditor that we often undertook audit work for local Government operations. They always had to obtain a quote from NAO to confirm that we reperesented value for money. We were usually able to substantially undercut the NAO quote and obtain a fee yield af at least our normal charge out rates. We were always complimented on providing much more useful advice than would have been provided by NAO.  Why could that competitive pricing system not be reintroduced? That would then require NAO to become price competitive with the private sector to survive. That would be a far more cost effective way of obtaining value for money for the country than winding up the NAO with, presumably, massive redundancy payments to the grossly overpaid head honchos at NAO who would then "walk next door" and be employed in newly set up  Government divisions of the big Four. 

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19th Aug 2010 13:23

Competence of those running the show ..

Well they certainly know the right words and a lot of them. It is just a pity that the rhetoric cannot be backed up by sucessful performance

Clearly their risk assessment and controls are inadequate, otherwise they should have majored on migration issues and the on-going impact of getting it wrong. Why not publish the original risk assessment and we can all judge whether these issues were even addressed in the first place?

Are we missing something here with Lesley Strathie

'.. Principal Accounting Officer (PAO) and is accountable to Parliament for the Department’s expenditure ..'



What financial qualifications does Lesley Strathie have to qualify for the position in the first place?What systems delivery qualifications are posessed?

Without the requisite qualifications and understanding of these areas surely one of the risk assessments should be in respect of Lesley Strathie herself?

The recommendations on page 137 of the PDF make interesting reading and reinforce the inadequacies of HMRC approach to systems in general and specifically to rollouts

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By alandawson61
19th Aug 2010 13:34

Can you believe it?

I honestly didn't realise that HM Revenue & Customs had systems in place any more? I'd come to the conclusion that they were pretty much running around like headless chickens!  

I recently read that the Coalition Government had future plans for taking over payroll processing, whereby all employers would have to send details of their employees gross earnings and the required payment to HMRC, so that they would then calculate and remit the employees net pay.  If this occurs, I confidently predict that there would be a national strike within weeks of such a system being implemented, due to the majority of workers not being paid the right amount or on time.  So much for a healthy and sustained economic recovery then?

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By thump3s
19th Aug 2010 14:13

Hypocritical HMRC

I have read through some of this utter claptrap and am finding it hard to maintain my temper whilst reading ridiculous sections such as: risk appetite.

Anyway, looking at the remuneration report and skipping through the published payrises (another subject altogether) I read on page 32 this paragraph

Third party payments for services of a senior manager
For the period 19 June 2009 to 18 September 2009, £149,500 was paid to Orwell Consulting Ltd for the services of Deepak Singh (a director of that company) who held the position of Acting Chief Information Officer.

This is ontop of his salary of £45-50k (2009 £160-£165k) and bonus of £10-£15k.

Being sceptical by nature I called up the credit report for Owell Consulting Limited which shows the shareholders as Deepak Singh (50%) and Ms Sally Singh (50%). 

I do hope there is no income shifting going on here and that IR35 has been properly applied. What are the chances?

My blood boils.........................................




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By abelljms
19th Aug 2010 17:01

play as you learn.....



 I quote from your article……. “At its peak, the department assigned a total of 3,000 staff to the project, including 2,400 who were switched from their usual work supporting personal tax customers.”  Ah! so that explains why getting to talk to a PAYE office (about the twaddle their shiny new IT PAYE coding system spews out by the truck full) is now effectively impossible. I have basically given up trying to resolve some PAYE problems because it is too time-consuming.  Not that long ago I received a PAYE code giving someone £250k of car benefit. I concede that technically this is possible, but surely such a Code should be manually verified not just vomited onto the employers mat. IF we had been stupid enough to operate it guess whose tyres would have been slashed by the irate employee? I have many instances of PAYE Codes we have just ignored as they were plain stupid.   Obviously I don’t expect the rest of NE England to be employed checking PAYE Codes, but simple programming could trap unlikely codes for pre-posting verification, and that way HMRC don’t look so incredibly stupid.  AND the great new system proposed whereby employers will no longer do PAYE calcs, but still receive 100% of the queries from staff about PAYE, backed up by HMRC Offices with most phones off the hook most of the time to prevent calls, will further ratchet up the stress of employing staff, which will pressure more employers to using contractors to evade the PAYE junk which leads us to IR35/S.660 etc. zzzzzz.  Plus ca change as the Germans say….. 

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By stgreg
19th Aug 2010 18:31

The next PAYE fiasco is now being planned!

If HMRC cannot deal with the volumes of codings described above how will they ever cope when each employer has to file the PAYE information each month- that is 12 times as much informations as they get now.

One is tempted to hope that they actually drown in it.

What they need to solve their year end reconciliation problem is:

a - to introduce a sensible accounting procedure that doesn't involve them allocating (misallocating) receipts to each month and thsu creating work for themselves and unfotunately for us too, and

b - allow employers or their agents access (properly controlled) to either make the allocations or to reallocate HMRC mistakes.


Submit your comments on the proposals to HMRC before 23 September!


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By abelljms
20th Aug 2010 11:03

Most stupid thing HMRCy do competition here


  When you pay any taxes to them onslime, they automatically allocate it to the latest tax year first, thereby :- maximising the interest charge they charge on unpaid tax by leaving the oldest tax o/s. This also maximizes the number of calls to HM Collector in Shiipely when we say something like “allocate the tax payment to oldest year o/s muppet features”. We have even had personal visits from collectors where the tax had been paid, but just not allocated to correct year, and the guy himself has been able to see the balance on the account was £0 overall! Government efficiency improvements is EASY as long as you don’t let civil servants near the job.   

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By ringi
21st Aug 2010 15:15

The system will still be needed even if the new PAYE proposals f

    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
proposals for reform are put into practice.

Remember that most of the software is not dealing with just PAYE, but with all other types of income as well.

So it is clear that monthly PAYE returns will still need the same system, but it will of course need extending.

Having HMRC collect the PAYE tax rather than the employer will still need a very similar system do deal with all the other source of income. 

So it is unfair to say the complete system will be rendered redundant, it will need extending.  I think it is reasonable to say that any reform of PAYE depends on having a single view of each tax payer that is updated in real time as HMRC gets sent information.


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By Suzanneg
23rd Aug 2010 12:38

Have your say!

I know this is short notice but we (Armstrong Watson) are holding an event, in conjunction with HMRC and IPP (Institute of Payroll Professionals) to discuss with them the new PAYE reforms on Sept 10th in Cumbria.  HMRC so far are only holding a few of these events and I know a lot of them are booked up already. 

If any of you are interested it is totally free but places will be limited.

For more information and to book please visit the Armstrong Watson website for further details: http://www.armstrongwatson.co.uk/yourneeds/hmrc-discussion-document-proposed-changes-to-paye/526

This is a genuine chance for you to voice your concerns/opinions direct.



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