Wrong tax codes - the truth


The press has recently been full of stories relating to the demands for the tax for individuals who have been given the wrong tax codes.

So what has happened?

It you read much of the comment you would imagine that the present problem has been caused by complications caused by a new computer system. However it is not at all certain that this is the case. In reality a new computer system has now allowed HMRC to put right previous mistakes - which may be little consolation to anyone facing an unexpected tax demand.

The reality is that the internal systems within HMRC had been allowed to deteriorate when it was a manual system. Therefore the old year end reviews of each person's tax position were not always completed. So if you moved jobs, or your benefits changed then you might have paid the wrong tax but no one had the time to check. It appears that the computer is more diligent - and the requirement to submit PAYE returns electronically improves the HMRC response. Which is bad news if you owe them money.

Why were the Code numbers wrong?
Generally speaking if you have stayed in one job all year and do not receive benefits in kind or investment income then your tax deducted from your salary is usually right. However if you have a second job or a pension then the wrong tax may have been deducted if your two tax offices did not speak to each other. Both jobs could have been giving you an allowance e.g. for pension when only one was due etc.

So the problems arose because the different tax offices dealing with different areas of your life did not properly communicate the information. In theory they would try to review the affairs of all taxpayers to bring together this information. With reduced staff, changes of systems and offices and low morale, this has not been happening.

Are more tax codes wrong than normal?
We have certainly found that there have been many more errors in code numbers for 2010/11 than we have ever seen before. Indeed there have been cases where code numbers have been issued correctly, amended when we pointed out the error, and then re-amended back to the wrong code "by the computer".

What do you need to do?
If you have a refund which you were not expecting then you may look for investment advice on how best to maximise the return. If so we can help you. Otherwise enjoy your spending!

If instead you owe money then you will want to consider if there is anything you can do to avoid paying. HMRC publish guidelines which they operate to decide whether to collect all the tax which is due.

The first thing you need to do is decide whether the tax demanded is correct. It is very common for HMRC to make errors. If the demand is wrong then you can write to tell them.

If the unexpected bill is correct then the main opportunity will be to make a claim under Extra Statutory Concession A19. This sets out the rules which HMRC apply.

1 You must be an individual who is paying income tax

2 Information must have been sent to HMRC

3 They have not acted on that information until 12 months after the end of the tax year in which it was sent.

4 You must have had reasonable grounds to believe that your tax affairs were up-to-date.

If these are met - so the demand is for income tax based on information which was sent to them in the tax year ending 5 April 2009 - and you thought that everything was in order - then make a claim.

HMRC Morale
Much comment has been made in the press that the problems were caused by Labour's complex tax changes. The reality is more long term. The low morale in HMRC began in the Thatcher era and has worsened ever since. In the "old days" there was a link between any record for an individual taxpayer and a single official who was responsible for that individual. That was lost with the increasing centralisation. WIth it was the sense of responsibility for keeping up-to-date.

A related problem was that system changes to reduce staff were often preceded by the staff reduction - not allowed to follow.  The last government also imposed an annual 5% funding cut on the department.

International Comparisons
There has been much comment that the problems arise because of the complexity of the UK tax system.

Again this may not be taken at face value. In most other European countries the system of deducting tax at source does not attempt to achieve the sophistication of the UK PAYE. Hence an individual who has a change in tax circumstance often expects to have a tax liability at the year end - in a way which UK taxpayers do not. So although HMRC has undoubtedly failed to live up to the standards it should have - it would not be better elsewhere.

Potential Reform
There is a proposal to change the current PAYE system in order to make adjustments within the year to ensure that code numbers can be changed more quickly as circumstances change. 


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