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John Andrews of the Low Incomes Tax Reform Group ( www.litrg.org.uk ) points out that a forthcoming change to the time limit for claiming tax repayments could have unfortunate effects for some.

Fairness?

One proposal lurking in the depths of the 2008 Finance Bill is to reduce the current ‘6 year’ time limit for tax refunds to just 4 years. 

If you have been careless with your tax affairs, HMRC can go after you for 6 years of back tax. But HMRC now want to reduce their obligations to you down to 4 years, even where the repayments are due to HMRC errors. Where is the fairness?

HMRC hold a wealth of data about taxpayers on their files, but this is not always married together.  If it were to be amalgamated under individual taxpayer records, HMRC may well discover that large numbers of people have paid too much tax.  This is clearly contrary to their aim that we should all only pay the right amount of tax.

Getting tax back from HMRC

Most people believe that HMRC check every year to see if you have overpaid tax and if you have, an automatic repayment will come your way. Unfortunately this is not true, but it ought to be.
 
Some efforts are being made to change, for example, this year the long-awaited ‘PAYE Service’ is due to come online, which should allow HMRC to automate repayments to customers who have paid too much tax on their employment income. But we have yet to receive confirmation that this is what they will actually do. 

But HMRC’s data sources reach far wider than PAYE.  For instance, they receive information from the banks about interest on individuals’ accounts.  We know that HMRC intend to use this information to write to thousands of customers across the country where they believe that not enough tax has been paid on bank interest.  But what about those for whom matched records indicate that too much tax has been paid?  Will they receive a refund from HMRC? It does not look like it; we expect to see a “lack of resources” put forward as the reason why not. In fact, it will be a lack of will.

HMRC stand firm that tax repayments have to be claimed.  In the absence of a claim from the customer, HMRC will not make any effort to make a repayment even where they have enough information on their systems to determine that one is due.  They do not even intend to write to those customers to advise them that they might like to consider making a claim. 

Why things go wrong

Low-income taxpayers can pay too much tax for a variety of reasons, including:

• incorrect PAYE codes;
• by not claiming additional personal allowances such as age allowance, blind persons' allowance or married couples' allowance;
• through having 20% tax deducted at source on savings interest.

Where HMRC owe the taxpayer money they are now trying to limit their repayments to four years. They are trying to do this by an obscure clause tucked away in Schedule 39 of the Finance Bill which is coming up for debate very shortly.

Evidence as to why any change would be unfair

We asked the charity TaxHelp for Older People to undertake a sample of recent tax reclaims for low income pensioners. They analysed 80 of their recent refund claims. This revealed the following:

• 44% are claims for refunds going back 6 years
• All these claims related to where HMRC failed to advise the pensioner that tax was owing to them
• The average claim is £1,963 for the 6 year period (an average of £327 per annum)
• The highest claim was for £5,200
• The lowest was for £37
• Most claims were in the region of £1,000 to £2,000

These are revealing statistics and show how inequitable it would be for HMRC to remove two years of these repayments.

HMRC make frequent mistakes when dealing with pensioners. For example, we have come across numerous taxpayers in their 80s who have never had the benefit of age allowances and have therefore been overpaying tax for 15 years or more.  To cut off a further 2 years adds insult to injury.

A year ago HMRC estimated that there were 180,000 pensioners who had overpaid tax, yet to our knowledge they have not even started to find out who these people are, let alone make them repayments

It is now up to MPs.

Until such time as HMRC put their own house in order by matching all data in their possession and contacting taxpayers who are likely to have overpaid, we are strongly against a reduction in the time limit for claims. And so should every MP sitting on the Finance Bill Standing Committee be.