Errors in tax return software force paper filing

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Glitches in tax return software standards mean that two groups of taxpayers may have to submit their 2016/17 tax returns on paper, instead of electronically, to ensure that they don’t overpay their tax. 

Dividend confusion

The problems stem from the interaction between the separate allowances for savings and dividends, the personal allowance, and the additional rate of tax on income over £150,000. The two groups of taxpayers affected appear to be:

  1. those with total income made up of savings and non-savings income over £32,000 of which the non-savings income is between £11,000 and £16,000
  2. those with non-dividend income of £27,000 to £32,000 plus dividends which take their total income to more than £145,000

Individual taxpayers (not trustees or personal representatives) are entitled to the dividend allowance of £5,000, which taxes the first £5,000 of dividends at 0%, within the tax band the dividends fall into. Dividends are taxed as the highest slice of income. 

Group A

These taxpayers should benefit from the savings rate band of up to £5,000 as their non-savings income not covered by the personal allowance will not use all of the savings rate band. The HMRC tax return software specification fails to give the benefit of the savings rate band in this scenario and hence overcharges taxpayers in this group by up to £1,000.

Example

A taxpayer with non-savings income of £11,000 and savings income of £26,000. The correct amount of tax for 2016/17 is £4,000. Using software based on the HMRC software standards will calculate the tax as £5,000. If you file online the taxpayer will be overcharged by £1,000.

Group B

These taxpayers do not receive any personal savings allowance, as their income makes them additional rate taxpayers. However, they do qualify for the £5,000 dividend tax allowance. The HMRC tax software specification incorrectly deducts the dividend tax allowance that falls in the unused basic rate band from the higher rate band which then pushes dividends up into the additional rate. This error could cost up to £280 if the return is filed electronically instead of by paper.

Software standards

These problems illustrate an underlying issue with the standards set for tax software by HMRC.

All tax software developers are required to produce tax return software which abides by computational standards set by HMRC. If the software doesn’t follow those computational rules, the tax return will be rejected by the HMRC’s electronic gateway. This is a sensible control mechanism.

Software developers have confirmed that the 2016/17 tax return software has to have identical calculations to those performed by the HMRC system, or it cannot be approved by HMRC. Any software house using the HMRC computations should be able to successfully file a return in the excluded scenarios, but the tax due will be overstated. Any software house not using the HMRC computations would suffer mass rejections of returns.

Work around

HMRC has added the scenarios for taxpayers in groups A and B to their exclusions list which was issued on 17 March. The official instruction is to file the returns for taxpayers who fall these groups using a paper return rather than by online filing. This means the affected taxpayers will remain on the ‘paper filing’ list until filing for 2016/17 tax returns is completed.

Tim Good and Giles Mooney, two of the directors of Absolute Software, have been working with HMRC and speaking to the Treasury about this year’s complexity following HMRC’s decision to use Good’s spreadsheet calculator algorithms as the basis for their calculation software this year. It appears that HMRC’s specification for its own tax calculation software includes two errors, which are not present in the spreadsheet.

Tim Good explained: “I had a meeting with HMRC last November to clarify the computational issues and it looked as though they were going to be able to get it sorted in time for the new reporting season. But apparently, the team responsible for coding the main HMRC self assessment system was simply unable to complete the task from the Excel algorithms in time.

I have every sympathy for the HMRC team – the villain of the piece is the horrendous complexity that the interaction between the allowances gives rise to in certain (not that unusual) combinations of income.

We thought we were there just in time for the 2017 software release in early April but because of the coding problems they have encountered, HMRC has decided to go ahead with the instruction that all returns for the scenarios on the exclusions list should be filed on paper.”

Not software supplier’s fault

Whenever HMRC’s software standards are not in line with tax law, tax returns with incorrect tax computations are successfully submitted while correct returns may be rejected. These errors are only spotted when the same tax calculation is performed independently say on paper, or in this case, on a stand-alone spreadsheet. 

The solution is to have an independent body check the tax software standards set by HMRC, to ensure they are correct and in line with tax law. HMRC should not be permitted to check its own homework, as it does now.

This is not the first error to arise from incorrect tax software standards and it won’t be the last.

Don’t blame your software supplier – it really isn’t their fault.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

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27th Mar 2017 09:37

It's no surprise that these clowns can't even program their own software to follow their own silly rules!

This stuff is easy as pie compared to Making Tax Diabolical, they've had a year to get it right and they've still screwed it up.

Hideous Mistakes from Right Charlies

Thanks (15)
27th Mar 2017 10:37

Why can't taxpayers submit information using HMRC software and just complain to HMRC that their calculations are wrong?
Isn't that better than paper submission?
I assume 3rd party software has correct calculations but can HMRC calculate the tax correctly?

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By Tornado
27th Mar 2017 10:51

As I have said on more than a few occasions, MTD is entirely software driven and HMRC are in sole charge of ensuring that EVERY part of the system, both internal software and commercial software that we are going to be forced to use, works faultlessly together. If it does not then there is bound to be chaos and it will NOT be our fault.

This then raises the question as to how Agents are going to be compensated for the potentially significant amount of additional time it will take to sort out of some of these problems caused by HMRC errors.

It is all very well for HMRC to intimidate us with the threat of onerous fines and penalties but that can only be valid if they are entirely blameless, and I cannot see that being the case for many years yet.

Time now, I think, to press the Government for a more transparent statutory compensation system that pays out automatically in certain circumstances. If it can be done for the Railways, then it can be done for tax as well. This would also relieve pressure on the Appeals system, which in my experience, is deteriorating as we watch.

Thanks (13)
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By DMBAcc
to Tornado
29th Mar 2017 10:38

Dear Tornado, I have enjoyed your consistent comments here especially relating to MTD. Sadly the truth is, as I learned from yesterday's HMRC webinar, that HM Treasury has declared war on us especially the small businesses. They believe us all to be incompetent rogues hiding taxable income from them. If they can't increase revenue from their [***]-eyed MTD system then they will recover it through fines. Many of my clients run small holiday based businesses. They work 7 days a week from 5am till midnight between April & October without letup. They then hibernate during the winter when (with necessary whiskey in hand) they complete the paperwork ACCURATELY that I need to submit their tax return on line using HMRC software. Everyone is happy. I get a small fee, HMRC get their tax and the client gets to survive in this insane world. MTD will FORCE them to complete a tax return in AUGUST can you believe it THE MOST BUSY time of their year. I cannot get one decision maker to listen. It just beggars belief.

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to DMBAcc
29th Mar 2017 12:15

As someone who's both an accountant and a small holiday based business (although not 7 days a week, thank God) I whole-heartedly endorse your comment. With the additional thought that in my sector we barely scrape a profit and that was before the business rate rise.

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to Tornado
29th Mar 2017 11:38

Well said ! Perhaps the penalty regime for errors should apply both ways. Why shouldn't HMRC be penalised? Oh, yes! Because you and I and the other taxpayers will pay whatever penalty is levied.
I suggest that those actually in charge be made to pay the penalties...........out of their taxed income, as would be the case for us mortals.

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to sammerchant
30th Mar 2017 08:54

Sammerchant, you are, of course, ethically and morally right. HMRC should be liable when wrong. The only thing stopping this is a legal doctrine called Crown (or Sovereign) Immunity, which does raise HMRC and all crown agencies above "us mortals".

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By DonDan
27th Mar 2017 11:15

Apologies if i've missed something obvious but isn't the 0% charged on the first £5k so you would expect it to come out of the lowest band available?
If you have a salary of £32k and divs of £150k
You'd have:
£32k @ 20%
£5k @ 0%
£113k @ 32.5% (remaining higher rate band)
£32k @ 38.1%

My read of the article above is that you would get a full higher rate band of £118k and the £5k being knocked off the additional rate band i.e. the £5k coming out of the highest band.

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to DonDan
27th Mar 2017 14:57

Your analysis is correct – the £5,000 does come out of the £118,000 HRB in your example (and this combination of income is not within the HMRC exclusions).

But if you had a salary of £31,000 and dividends of £150,000 your commercial software and HMRC will get it wrong by £56 (38.1%-32.5%) x £1,000.

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By DonDan
to Rebecca Cave
27th Mar 2017 15:23

Thanks Rebecca, I appreciate the clarification

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to Rebecca Cave
28th Mar 2017 11:27

Can you please tell me why you are taxing the dividend allowance last and not first? The factsheet from HMRC https://www.gov.uk/government/publications/dividend-allowance-factsheet/... says you will not pay tax on the "first" £5,000 worth of dividends, rather than the highest rate of tax.

Thanks,
Alex

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to alexkogan
29th Mar 2017 13:51

Two, different, firsts.

The first "first" is the underlying order of taxation - i.e. the way the allowances and bands are consumed by taxable income - and is still, approximately, taxable non-savings, then taxable savings, then dividend income. Approximately because changes made in the recent times has meant that the concept of liability being the sum of three, stand-alone, calculations, has been chiselled away. The second "first" refers to the first £5,000 of Dividend Income.

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27th Mar 2017 11:51

Well that should force some of us to embrace MTD sooner rather than later hahaha.

You couldn't make this c**p up.

Rebecca did say "don't blame your software supplier" therefore third party software is definitely affected by this and we will have to file paper returns presumably? Is there likely to be a fix before filing commences in earnest?

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to mfbrown185
27th Mar 2017 13:21

How can third party software be affected by this problem?
I accept that there's a problem if HMRC will reject the submission from third party software if there's a certain combination of income but that seems madness.
Can't 3rd party software just calculate the tax correctly?

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By Tornado
to petersaxton
27th Mar 2017 13:51

I think the point is that 3rd party software will carry out the correct calculations but the HMRC software will not. If you file using 3rd party software, HMRC will carry out different calculations and reject the 3rd party calculations. By submitting on paper, HMRC will have to input the data into their system manually and at the same time can 'correct' their own software to overcome the faulty programming.

The most alarming aspect of this problem is the lack of quality control over their own software. It is another tangible reminder of the inability of HMRC to 'design' software systems that work correctly.

With MTD, the massively complex software system that HMRC are 'designing' will need constant changes as the Government annually alter tax rates & allowances. There will now only be Autumn Budgets so this should allow more than enough time to amend the tax administration software by the following April, so that will be OK then.

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By Giles M
to Tornado
27th Mar 2017 14:24

All third party software must follow HMRC's 'rules' or the returns will be rejected, so if the HMRC figures are incorrect, the tax return ones must be too to file.

Therefore the answer to these questions is, yes, all third party software will be affected.

HMRC have confirmed to us that there will be no fix for the 2017 returns. This is because once the return season opens on 6 April 2017 the same methodology has to apply from then on to avoid all sorts of inconsistencies. So we are going to be stuck with this even if we delay filing the 2017 returns.

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to Giles M
27th Mar 2017 14:57

So an accountant does everything right but HMRC rejects the submission? Surely that is HMRCs fault. The accountant would just say they had done everything correctly.
I submitted some paper accounts to Companies House and they blindly rejected the accounts because of a change in the law. They didn't take into account that the period was for nine months and so was correct. Companies House accepted my point and asked me to send the accounts back. I told Companies House that I had submitted the accounts to Companies House so they had nothing to complain about and I had a valid defence if they prosecuted. Unfortunately, despite my client being supportive, I didn't feel it was fair to drag him into the issue. It's amazing how these people act like they are above the law!

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By Tornado
to petersaxton
27th Mar 2017 15:29

"It's amazing how these people act like they are above the law!"

I think the problem is that whilst the laws get more complex, the number of people that actually understand them get less.

Acting as if above the law is therefore possibly a sign of not actually understanding the law, and a hope that you do not either!

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to Tornado
28th Mar 2017 15:55

From experience: it is a sign of not understanding the law, AND not caring in the least - because there are no consequences whatsoever for reckless behaviour.
For an example, just look at the torrent of unlawful APNs being issued on a daily basis, leaving agents and recipients to explain to HMRC what the law says (and HMRC responding with letters clearly demonstrating they still don't understand nor care to understand).

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to petersaxton
29th Mar 2017 11:45

Only thing being that, if you have the return rejected then it's not submitted, so you have not done everything correctly. In order to get the return through the digital gateway you correctly have to do everything incorrectly, or is it you incorrectly have to do everything incorrectly or incorrectly do most things correctly but somethings incorrectly.

Thanks (4)
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to Tornado
29th Mar 2017 16:18

The words 'backside' and 'both hands' come to mind! I have given up complaining and now just try to live with this total mind-boggling rubbish.

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27th Mar 2017 12:06

Does anyone know where the exclusion list Rebecca refers to can be found online please?

Most recent one I can find on Gov.uk is January 2017?

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By booksy
27th Mar 2017 12:14

Um not being funny like but how come I get emails about seminars, help available, etc and my clients get reminders on their phones every month about things but not one message or email or notification is about exclusions where paper filing has to take place? Is there some secret email/notification list out there? If I didn't subscribe to AW I wouldn't have known about this. Something smells as usual.

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to booksy
27th Mar 2017 13:59

Your tax software should flag up the exclusions automatically so you don't usually need to know. HMRC publish the exclusions on their website at the start of April, and have been known to update it throughout the year. Your software should keep up to date with the list of exclusions and highlight cases that cannot be filed, prompting you to file on paper.

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By booksy
to Tim Vane
27th Mar 2017 15:33

Ah cheers Tim. Is there any third party software you would recommend?

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By Tornado
to Tim Vane
27th Mar 2017 15:36

Reminds me of the early days of online filing when some clients simply could not understand how I filed their tax returns online. I am sure some thought I beamed them through 'Star Trek' style, and some probably still do!

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27th Mar 2017 15:35

Can't say I'm surprised. The interaction between income streams, rate bands and allowances is so complex and produces infinite permutations, it was inevitable that the software would bungle at least one.

Wouldn't surprise me if there are not more, and its just that the exact permutation hasn't arisen yet.

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By kdbr
27th Mar 2017 15:40

And next year, when we add Scottish rate bands into the mix, all will be well...

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28th Mar 2017 09:08

[***].....I look forward to MTD...it will be utter chaos....

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28th Mar 2017 17:49

I think my "Project Brewery" should be mandatory training for all senior HMRC managers.

It is an intensive one day course taking place in a brewery run by one of my clients. Delegates will be assessed during the day on whether they have been able to run a pizzs up in the brewery. Those that fail the course will be assigned to the Making Tax Digital team so they fit in well.

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29th Mar 2017 10:26

Even the basic stuff often doesn't work and case in point is yesterday when I was with a client and we checked the PAYE record online.

PAYE reported a credit balance of £2050 - "great" said the client but why have I got this demand

So we phone HMRC enquiring about the credit, "no that's wrong your client owes us £600".

I pressed as to why the website is wrong and why they can't fix it and I was basically met with silence.

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to youngloch
30th Mar 2017 13:28

The problem is that the PAYE record the call centre staff look at isn't the same as the record you see. Your's has been entered manually by someone who can't see the call centre record.

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By Oppco
29th Mar 2017 10:37

I'm not surprised either, it's practically impossible to calculate personal tax liabilities without a computer these days.

Blame the Chancellor & Treasury!

HMRC software...MTD here we come

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By Oppco
29th Mar 2017 10:37

I'm not surprised either, it's practically impossible to calculate personal tax liabilities without a computer these days.

Blame the Chancellor & Treasury!

HMRC software...MTD here we come

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29th Mar 2017 11:03

This will lead to even more confusion for taxpayers and practitioners, on the subject of the dividend and PSA nil rate bands, which I believe are already not fully understood. Only yesterday I saw the dividend NRB classified as an exemption.

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29th Mar 2017 11:19

Probably a silly question, but, does this mean they will be restricted to the October deadline now instead of January?

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to Ellishem418
29th Mar 2017 11:27

Ellishem418 wrote:

Probably a silly question, but, does this mean they will be restricted to the October deadline now instead of January?

Exactly the question I was going to ask - and what if I don't find out that the client's tax return is going to be rejected until November, December or even 31 January?

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29th Mar 2017 11:21

If the problem is caused by HMRC's error, does that mean that we'll have until 31 January to file the paper returns rather than 31 October?

Or is that just wishful thinking?

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to l.laakso
29th Mar 2017 11:30

And what happens if you don't find out until 31 january when your online filing attempt fails?

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to robhenry
29th Mar 2017 11:44

Surely this must be grounds for a reasonable excuse, should the Revenue issue a late filing penalty.

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to l.laakso
29th Mar 2017 11:46

Because it is an HMRC error you should have until 31 January to file the paper return without penalty. I have done this on a previous occasion when we only learned that the client's return could not be filed on line on 30 January. There will be a 'reason for filing on paper' form that you should send in with the return on which you give details of the particular exclusion that applies to your client - it will have a reference number, I seem to recall, that you will need to quote. You may get an automatic penalty, I did, but you simply quote their reference back at them to get the penalty cancelled.

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29th Mar 2017 11:23

Ha ha ha ha!

The final, conclusive proof that we are being ruled by imbeciles.

Is Upper-Class Twit of the Year a real thing?

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By rosn
29th Mar 2017 11:24

Thank goodness for the Absolute Taxpert app - it will be the best £99 (+ VAT) you'll ever spend! Google it now.

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29th Mar 2017 11:37

Does this mean that HMRC have given up trying to fix the errors, or are they going to correct their software at some later stage? If the latter, maybe we will hold off filing the few clients we have that fall within these criteria.

Also will HMRC set the clients that need to file on paper as having to file by October 17 or allow up to January 2018?

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29th Mar 2017 11:39

Surely it is unfair to blame HMRC for this fiasco - they are (believe it or not) human. The problem lies with the idiots that have occupied No. 11 Downing Street for the past 20 years who have created a system of allowances etc. that is absurdly complex where mistakes are inevitable. In this instance the HMRC is effectively caught in the middle (or should that be "muddle").

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By Tornado
to simonwwhitt
29th Mar 2017 11:59

"Surely it is unfair to blame HMRC for this fiasco"

I cannot agree with this statement. Whilst Government are responsible for policy, it is the Civil Service who are responsible for making it happen and in the case of MTD, HMRC have been grossly incompetent in the way they are trying to implement this and other associated policies. They also act as advisors to the Government and have clearly misled successive Governments about the viability of the MTD project.

In my view, the MTD fiasco it is entirely the responsibility of HMRC and they, and only they, will have to take the blame for the chaos that it will cause.

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to simonwwhitt
29th Mar 2017 12:09

Fair and HMRC in the same sentence . . . hohohohahaha - how I laughed.
They're a damnable set of mendacious hypocrites.
I have as much truck with "Its not their fault" as they have with my failure to ditch my work to spend full-time understanding how they're going next to trick me into a fine.
I provide a free service to HMG by paying HMRC, and the cost to me in time and money just keeps going higher and higher.
Why should I be disposed to not treat them as they treat me - i.e. with utter contempt.

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By hfc1875
29th Mar 2017 11:47

so as I understand it - using 3trd party software we will input the correct data into the tax return - the tax return will have the correct figures but our 3rd party software will calculate the wrong tax based upon the correct figures inputted so that it can electronically submit the tax return and have it agreed by HMRC with the wrong tax liability - all quite acceptable by HMRC. And then we advise the client to pay the correct tax - and then HMRC charges penalties for non-payment of tax... and then....only joking on that last part. You really couldn't make this up

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By SXGuy
29th Mar 2017 11:48

Roll on MTD....not.

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By SXGuy
29th Mar 2017 11:51

Lets take a look at the errors caused by filing on paper shall we.

I myself filed on paper last year, taking a copy of the figures id entered, and of course knowing my tax liability.

HMRC somehow managed to send a statement missing a zero off the end of my net income, resulting in no tax to pay.

I then submitted an online version hoping to correct the mistake, and have heard nothing from them since. Needless to say I have paid what I correctly owe, however I wonder how long my account will stay in credit for until someone notices "their" mess up.

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