Tax Factor
01 October 2010
Whoops - we got 6 million of you wrong !!!
Over the past few weeks the media has been full of articles and comments on the admission by H M Revenue & Customs (HMRC) that they have got nearly 6 million taxpayers' tax liabilities wrong. In this article we take a look at what has really gone on and what individuals who have been affected should do.
Numerous reasons have been given as to why and how these errors occurred, ranging from the merger of the Inland Revenue with Customs and Excise, staffing cuts, taxpayers not staying with one employer all their working life and/or having more than one job at a time. Whatever other factors may have come into play the root of the problem seems to be that individuals' tax records were held on more than one database within HMRC and that these databases did not talk to one another.
HMRC's new computer system means that all tax records for an individual are held together in one place so that the total tax liability can be calculated easily and underpayments or overpayments of tax established. It is the ‘catching up' exercise that the new system has made possible that has brought about the recent surge of attention.
But the media coverage has to a large extent been reactive with little in the way of pro-active comment. Putting aside the reasons for the errors and accepting that they have occurred, what can or should individuals do now?
Firstly, taxpayers who complete self assessment tax returns should not be affected as their individual tax liability is calculated each and every year and any tax due or repayments of tax arising will be agreed on an annual basis.
Those who have received a letter from HMRC stating that they owe tax for 2008/2009 and 2009/2010 should start by carefully checking HMRC's figures. Details of income or private pensions together with the PAYE tax deducted can be found on the certificate of pay and tax (Form P60) provided by the employer or pension provider. Taxpayers who are liable to tax at 40% on part of their earnings or pensions may find that HMRC calculations may well be based only on this income and have failed to take into account any investment income such as bank interest or dividend income on which additional tax may be payable. It is also possible that the calculations will not include any higher rate tax relief due on pension contributions or payments to charities made under Gift Aid.
If the figures are correct and show that tax is owed it may be possible to claim that HMRC have failed to correctly use information that they had in their possession and that some of the arrears of tax should be written off. Such claims can be made under Extra Statutory Concession A19. However, Treasury Minister David Gauke has already stated that taxpayers should not ‘build up their hopes' that such appeals will succeed. Careful consideration will need to be given in the wording and the reasons put forward for such claims in order to achieve the best possible chance of success. If copies of relevant correspondence with HMRC have been kept then these may prove to be very useful in support of claims.
Looking to the future, what can individual can do to ensure that the correct amount of tax is paid? Alas, as recent events have clearly demonstrated, it is not possible to assume that the PAYE system can be relied on to do the job. Whilst PAYE has been a robust enough system since its introduction in 1944, it was never intended to be, and has never been, an exact method of dealing with an individual's total tax position where there is more than one source of income. Until such time as a better method is available taxpayers need to be aware of its limitations.
To help prevent unexpected tax demands in the future we recommend that employees and pensioners take the following actions:
- Check notices of coding when they are received. (If you normally rely on your accountant to do this you should be aware that as a cost cutting measure HMRC will no longer be sending copies of annual coding notices to your accountant, so you will need to send them a copy yourself.)
- Query any figures which appear incorrect.
- Keep HMRC informed of changes in circumstances, changes in company cars or other employer-provided benefits and new or increased sources of income.
- Check your payslips to ensure that your employer or pension provider is actually using the latest PAYE code issued by HMRC.
After the end of each tax year we recommend that a calculation be made, taking into account all sources of income, all allowable deductions and all tax paid or credited as having been paid, in order to ascertain if tax has been over or underpaid. This recommendation applies to everyone not already required to complete a formal self assessment tax return so that if further tax is due provision can be made to settle it. And if tax has been overpaid, a claim for repayment can be made straightaway without having to wait for HMRC to spot the error!
If you are faced with an unexpected or incorrect demand for payment of tax and require advice on dealing with this then please contact any Wilkins Kennedy office.
