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.
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:
- 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
- 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.
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.
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.
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.
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.
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.