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The practicalities of dealing with PAYE tax calculations are beginning to unfold for HMRC as taxpayers react to the first batch of underpayment estimates – LITRG gives an update.

Trial… and error

When HMRC sent out their first 45,000 tax calculations, the full range of circumstances giving rise to underpayment calculations and the types of taxpayers who would be hit were not immediately apparent. Taxpayers are now reacting to the first batch of underpayment estimates and their experiences vary.

However, one thing is certain - there are many very low income and vulnerable people caught up in this exercise, receiving “demands” which they have no hope of paying. This is certainly not just a case of HMRC only putting right tax errors that people could have been expected to know about. On a positive note, it was certainly a wise decision by HMRC not to have pushed the big button on their new computer and immediately sent out large volumes of tax calculations.

Experience of tax calculation recipients

People we have spoken to who have received underpayment calculations have, not surprisingly, been shocked and distressed to find that they have a potential underpayment of several hundreds or even thousands of pounds.

We have, so far, only spoken to a very small proportion of the people who were sent a tax calculation in the last three weeks but we can conclude that:

• Many people receiving a calculation will have a case to challenge HMRC in the ways which we indicated in our step-by-step guide (see ‘useful links’ below).
• Tax calculations have brought new taxpayers to light. For example, an individual who retired early on ill-health grounds many years ago and who has a small occupational pension taken early has now been (correctly) matched to the incapacity benefit (IB) he also receives. A combination of the two takes him above the tax threshold. If HMRC had done this matching earlier on, the extra tax payable would probably have been covered by an increase in his means-tested benefits. We expect HMRC to write this off, but we are waiting to see.
• The extremely complex age allowance restrictions for pensioners will make automatic reconciliation a process nightmare for years to come. HMRC guidance to the 65 and over population as to how their additional age allowances are clawed back as their income rises has always been sketchy and, in recent years, non-existent for the average PAYE pensioner. So an 82 year old pensioner with several small pensions took a part-time job which was taxed by HMRC at the basic rate with no allowances. He quite rightly expected his tax affairs to be in order. But as his total income then rose above £21,800 in 2008/09 his marginal rate rose on some of this extra income to 30% - impossible to understand for other than a tax specialist. Another case for write off with the individual probably being put in self-assessment for as long as he works, adding to costs all round.
• Many frail and very elderly pensioners are being caught in this exercise and we have provided to HMRC (with the help of TaxHelp for Older People) a range of examples which we hope they will be writing off. We also hope that these types of cases will be eliminated from future computer runs as it is clear that they have caused extreme distress and worry.

Design faults

In our original guidance we identified significant weaknesses in the guidance (P800 Notes) provided to taxpayers to enable them to check and challenge the HMRC tax calculation. We have provided HMRC with further suggestions for improvements and we shall see if these are taken on board.

What we had not expected was that the tax calculation itself (the P800) would be poorly populated with information. The form has large blank areas which get filled in by the computer prompted by the individual circumstances of the taxpayer which is supposed to provide extra guidance. This language is also confusing and needs attention if people are going to understand the notices. And it is not always obvious from the form exactly how someone is supposed to check the information they are sent. This all needs to change before the larger computer run later this month.

Examples of confusing explanations (reproduced exactly) that we have seen include:

• The reason for the underpayment This is the tax underpaid for the year.
• The reason for the underpayment not enough tax was deducted in the year.
• The reason for the underpayment to much personal allowance was used in this year.

Such statements will neither help nor impress the taxpayer.

Bearing in mind that many of these difficulties are caused through the individual having multiple sources of income, it seems baffling that in many cases we have seen the calculation lumps all the individual’s sources together under the unhelpful heading “PAYE income”. How can someone check this without going back to HMRC and asking for a breakdown?

What are we going to do next?

There is clearly the need for more support for people who receive an underpayment calculation and we intend to expand upon the advice given in our earlier step-by-step guide; and - before the next tranche of calculations are issued by HMRC - we intend to produce separate guidance as follows:

1. Errors by employers and pension-payers
2. Delays in using information by HMRC
3. Misleading information from HMRC
4. The impact of means-tested benefits
5. How the complaints process and Your Charter may help

When we see the revised P800 notes we will also produce a revised commentary.

What you can do to help LITRG

We need as much information as possible about how HMRC are reacting to requests from taxpayers to reduce or eliminate tax calculation underpayments. Please provide us with your experience by telling us via our Contact page.

Useful links

LITRG’s step-by-step guide on P800 tax calculations