HMRC Tax Error. The Facts.

Almost 6 million people have been caught up in what has been dubbed a huge tax blunder. Here we look at who is affected and what they can do.

What's happened?

In a nutshell, around 4.3 million people have paid too much tax through the Pay As You Earn (PAYE) system, while HM Revenue & Customs says a further 1.4 million people have not paid enough tax.

How has this happened?

Every year, HMRC checks that the amount of tax and national insurance deducted by the employer matches the information held on its records. This is called the "end of year reconciliation" process.

However, this wave of errors is linked to the introduction in June 2009 of a new IT system, which holds all the information on an employee in one place, rather than having it spread over several different systems - making it easier to see if people have paid the wrong amount of tax.

The Revenue admitted a few months ago that the transition to the new system had "brought to light discrepancies... and this is resulting in a number of incorrect [PAYE coding] notices being issued".

This same system is now being used to do the reconciliation process for the tax years 2008-09 and 2009-10 - resulting in these new underpayment and overpayment calculations.

What sort of people are affected?

The wrong amount of tax may have been paid if people failed to tell HMRC about a change to their circumstances, such as starting a new job, having more than one job or receiving a new benefit through work, such as a company car. Individuals may also have paid the wrong amount of tax if their employer has used the wrong tax code.

How do I know if I'm one of them?

HMRC this week began sending out the first batch of letters to around 45,000 of those affected. It will contact the remaining people between now and early January. "Most people have paid the right amount of tax so won't get a letter from us with a revised tax calculation. So don't worry if you don't receive a letter (and there is no need to contact us if you haven't received one)," says the Revenue.

How does the Revenue intend to take the money back?

If you owe less than £2,000, you won't get a bill - instead, your tax code will be changed from April 2011. Effectively, you will pay it back in monthly instalments deducted from your salary during the 2010/2011 tax year.

If you owe more than £2,000, you must repay the amount in a lump sum.

Do I have to pay up?

Some experts said people hit with an unexpected tax demand may be able to refuse to pay up as Revenue & Customs could have exceeded its own time limits in which to ask for the money.

The Low Incomes Tax Reform Group said any calculations produced by HMRC which result in an underpayment of tax should be treated with caution. It is urging recipients to "check and challenge" them.

"The underpayment may have arisen because HMRC have failed to make timely use of information about you which they have had in their possession," said the group. In such cases, individuals have the right to ask for the unpaid tax to be written off through what is known as an "Extra Statutory Concession" or ESC A19.

The rules state that if Revenue & Customs was provided with all the necessary information needed to correctly attribute a tax code, it should have used this within 12 months of the end of the tax year in which it was received to claw back the full amount of money. As a result, individuals cannot normally use ESC A19 to ask for tax owing for 2009/10 to be written off, but a group spokesman said: "If HMRC have persistently got something wrong year after year, we would expect them to write the tax off for all years up to and including 2009/10."

Is there some help available?

The Low Incomes Tax Reform Group was one of the first to produce sample letters that those affected can tailor to their own situation and send off to HMRC in an attempt to get the underpayments waived. Its guide, including the template letters, is available from the LITRG website via the link: http://tinyurl.com/taxletters

What if I can't afford to pay back the money?

HMRC advises people who genuinely cannot afford to pay the tax to contact it to see if it can come to some arrangement with them. It may be that they can pay some now and some in the future. This will be done on a case by case basis.

What is happening with refunds?

Around 4.3 million people have paid too much tax, and are due average refunds of £420. If you are one of them, a "payable order" (essentially a cheque) should be sent to you within five to 14 days of receiving the letter.

Source: www.guardian.co.uk (To view the original article, click on the heading at the top of this post).