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LITRG explain how to challenge your 2011/12 PAYE coding if it shows a restriction for earlier tax underpaid and you have not yet agreed with HMRC you should repay it.
 

Introduction

HMRC have been sending out coding notices with “underpayment restrictions” included in them for the year 2011/12. These will attempt to collect tax which HMRC say has been underpaid for earlier years.

In many cases, HMRC will not have explained to their customers the reasons for the underpayments or whether they should have been collected from someone else such as an employer or pension provider, or written off. This is unsatisfactory and should be challenged. We explain below what to do.

HMRC’s attempt to collect tax underpayments for the years 2007/08 to 2009/10, predominantly from people on low incomes, has not been a happy experience. HMRC have learned a number of lessons on the way.

Although things should be better in years to come we still have residual problems for these last three years.

Coding notices for 2011/12

If you have received a coding notice for 2011/12 which includes a restriction for underpaid tax relating to earlier tax years then there can be several situations applying, each of which may demand a different response:

You agree

You may have understood your situation and you accept that the amount owing should be paid by you as both HMRC and your employer or pension payer acted entirely properly.

The things to check are that:

• the underpayment figure agrees with the HMRC calculation (‘P800’) sent to you previously; and
• it has been correctly reflected in the restriction shown in your PAYE code so that the right tax is collected from you; and
• the code will not mean your employer or pension provider has to restrict their tax deductions to the maximum 50% (half) your income from that source. This will only happen if you have a ‘K code’, and it could mean that it is not possible for you to pay back the underpayment over just one year.

You don’t agree

There could be a range of circumstances which make you unhappy to accept the restriction in your coding. These could include:

• the coding notice is the first time you have had any indication from HMRC that you have underpaid any tax;
• HMRC have not explained to you how this underpayment has arisen;
• you believe that either your employer or pension payer was at fault or that HMRC failed to act upon information in their possession, and you are waiting for HMRC to agree that they will not collect the underpayment from you.

The restriction shown in the coding notice will be applied to your pay or pension from 6 April 2011, but you may not wish your employer or pension payer to operate the restriction unless HMRC convince you that the alleged underpayment is correctly calculated.

You can try to stop it by lodging a formal objection to your code.

To help you do this, we have drafted a sample initial objection letter, which can found on the LITRG website and opened as either:

A PDF document
A Microsoft Word document

You should not delay as time is short for HMRC to act upon your objection. Once HMRC receive it, they may reconsider the code and amend it by agreement with you. If you do not reach agreement, you can appeal against HMRC’s decision, through their internal review process and/or to the independent tax tribunal.

Complain

Leaving aside the accuracy of the underpayment situation, we have had many reports of HMRC giving conflicting advice and of staff being abrupt and sometimes aggressive. They are under a lot of pressure, but that is no excuse, because for you the potential underpayment is even more distressing.

In these circumstances we would encourage you to lodge a complaint. Depending upon the circumstances, this can lead to the write off of tax and the payment of compensation.