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Millions of PAYE taxpayers could be receiving HMRC calculations showing an underpayment or overpayment of tax for the last two years – LITRG provides guidance for recipients.

Introduction

In June 2009, HMRC changed the computer system by which PAYE is operated. Because the new system was not well enough checked before launch it has spewed out millions of incorrect PAYE notices (called ‘codings’) caused mostly by faulty data already present prior to launch.

This same system is now going to reconcile the tax position of millions of people, starting last weekend. It is expected to throw up over 4 million repayments and close to 2 million underpayments (according to the BBC).

The two years to be reconciled are 2008/09 and 2009/10. HMRC will produce a calculation (on a form P800) and will expect taxpayers to check that it is correct. There will be another piece of paper (P800 Notes) which will 'give guidance'. However these notes do not tell the full story and will not give taxpayers all the help that they need.

We think this is a poor show and in breach of HMRC’s undertakings expressed in their Charter.

The fact that they will be trying to collect debts which, if they had done their job promptly, could well have been reimbursed to people on means-tested benefits by other government departments, makes the position even worse.

Key points to note

1.  Informal calculation, not a tax demand

These forms represent an informal calculation only, not a demand for tax. That will not be immediately obvious from either the P800 or the guidance. If the calculations are not understood they should be challenged and HMRC asked for a detailed explanation as to how things went wrong. It is by no means certain that they will be correct or should be agreed.

2.  Have you underpaid tax?

There are three main things to bear in mind if your P800 shows you have underpaid tax.

a. If you have underpaid income tax or capital gains tax for the year 2008/09, and you are satisfied that HMRC have all that time had the information they needed to calculate your tax correctly but have simply not used it until now, you should ask them to consider writing off the underpaid tax – i.e. remitting it and not collecting it from you – under the terms of ‘extra-statutory concession A19’.

The text of A19 is set out in our guidance (see link below) but will not be reproduced in the P800 guidance notes. Everyone who comes within the factual situation set out in the concession has the right for HMRC to consider it in their case.

That is not to say that they will inevitably get their underpayment written off – that depends very much on whether HMRC think you should reasonably have known you were underpaying. If you disagree with HMRC’s decision on that, you can refer the matter to the Adjudicator, but you cannot appeal. However, it is important to know that the concession exists, something about which HMRC are notoriously reticent.

b. If you have underpaid tax for either or both years, and you think it was your employer’s or pension provider’s fault for not operating the code given them by HMRC correctly or through making some other mistake, then in strict law HMRC must first call upon your employer or pension provider to make good the shortfall.

If you think you fall into this category, and HMRC are now trying to recover the underpaid tax from you, then you should challenge them.

c. The calculation produced by HMRC is not necessarily the full picture of your tax situation. You may be entitled to further tax reliefs or HMRC may not have matched all of their records for you. HMRC will not explain this fact very clearly.

Further help from LITRG

The Low Incomes Tax Reform Group is not an advice agency so cannot answer individual queries, but in view of the fact we do not feel that HMRC have done all they could to help the vulnerable and the uninitiated, we are providing extra guidance.

Whilst it is difficult to generalise as an almost infinite variety of circumstances could apply, our aim is to provide help which people can then fit to their own situation.

We have done our best in a short timescale to provide our initial guidance. You will find a link to our step by step guide to managing the P800 problem by following the link to our website at the end of this article.

We will be refining our advice as further evidence of the nature of problems occurring becomes apparent.

In the meantime (and before the large bulk of the 6 million calculations are sent out), we hope that HMRC can improve their guidance, particularly for people without access to the internet. We also hope that in areas of doubt, of which there are many, they will apply a generous and sympathetic approach.

Useful links

P800 calculations guidance on the LITRG website