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People on low incomes are losing out because they are not able to get the forms and information they need to receive bank and building society interest without tax deducted.

Introduction

An investigation by the Low Incomes Tax Reform Group (LITRG) of bank and building society branches and websites found that fewer than one in ten was able to provide account holders with all the information they need to receive interest gross of tax.

The results of the investigation are detailed in a report published last week by LITRG, along with a series of recommendations for banks, building societies and HM Revenue and Customs (HMRC).

Form R85 and Helpsheet

Normally savings income is paid to account holders after basic rate income tax (currently 20%) has been deducted, with the bank or building society passing on the tax to HMRC. Non-taxpayers, however, can apply to have their savings income paid to them gross (with no tax deducted) using an ‘R85’ form. It is possible to reclaim the tax after the end of the tax year, but it is more cost-effective for the individuals and HMRC if the R85 procedure is used. Due to a lack of awareness, many individuals lose out completely as they do not make a repayment claim in time. (A claim must be made within four years of the end of the tax year in question.)

LITRG undertook a mystery shopping exercise during 2012 to assess the performance of banks and building societies in publicising and operating the R85 procedure; this involved visits to branches and websites. The aim of each visit was to obtain up-to-date versions of both form R85 and the accompanying Helpsheet. An up-to-date Helpsheet is essential as otherwise the customer cannot calculate accurately whether or not they are a taxpayer. Only two of the 28 branch mystery shopping visits produced both an up-to-date form R85 and Helpsheet together. Producing little better results were the online mystery shops, with just three out of a total of 24 visits to bank and building society websites yielding both an up-to-date form R85 and Helpsheet together. The combined total was therefore five successes out of 52 branch and online mystery shops.

Launching the LITRG report, Chairman Anthony Thomas commented:

“Millions of people are overpaying income tax because they are incorrectly paying tax on their bank and building society interest. These are some of the poorest people in the country, with incomes below the income tax threshold.

“HMRC, banks and building societies all need to do more to publicise the form R85 procedure and when it is appropriate for an individual to apply for their interest to be paid gross. Ideally there should be continuous publicity on this issue, not just a one-off event every few years.

“This research shows that banks and building societies need to do much more to train their staff to be aware of the form R85 procedure, and the importance of providing up-to-date versions of both the form and the Helpsheet. This is particularly urgent in view of the risk of some older taxpayers being misled as a result of changes to age allowances from 6 April 2013. Banks and building societies must also improve their websites, so that it is easy for customers to locate the form and information relating to it.

“HMRC should be more proactive in obtaining information about interest payments from financial institutions, enabling them to reconcile data to individuals’ tax records and automatically issue repayments where appropriate. Now is the ideal time to be considering this, with HMRC’s development of personal tax statements and greater transparency of individuals’ tax records facilitated by improvements in technology.”

In 2010 the House of Commons Public Accounts Committee reported that HMRC estimated that approximately 2.4 million older people had overpaid around £200 million, because of not having their savings income paid gross of tax. In 1998 the Inland Revenue [now HMRC] believed that up to six million people were overpaying tax through failure to act appropriately. It was estimated that one million or more of this number were over the age of 65, but the total included taxpayers of all ages.

The LITRG report can be read in full here.