Flaws Uncovered In UK PAYE Tax System

by Jason Gorringe, Tax-News.com, London

07 September 2010

The UK tax authority, HM Revenue and Customs has announced that it will begin dispatching letters to taxpayers affected by the gross failings of the PAYE (pay-as-you-earn) system in Britain.

It is thought that over 10m taxpayers have paid too much in tax to the government through the PAYE system, while a further 1.4m taxpayers will have to pay back tax that they have unwittingly underpaid as a result of errors in the system.

The recently-revised figures, based on newly-released HMRC statistics compiled by the National Audit Office (NAO), show that failings in the PAYE system will leave the government paying out around GBP1.8bn to 4.3m people, an average of GBP418 each, having overcharged taxpayers from March 2008 through to April 2010. Records show that an additional 5.8m taxpayers have overpayments predating 2008, reportedly worth GBP3bn.

HMRC has said it is working to resolve all outstanding open cases, the number of which, the NAO revealed, could amount to as many as 18.2m.

The ramifications of receiving a letter from HMRC in respect of underpayments during the period May 2008 - April 2010 are likely to be considerable for those concerned. HMRC said that in total, 1.5m workers will receive letters to repay an average of GBP1,400 each. Those with balances above GBP2,000 will not be required to settle immediately, it has been reported.

The errors were uncovered after the installation of a new system to deal with the issuance of PAYE codes to taxpayers and businesses, which uncovered the extent of long-known discrepancies in the system. Currently, HMRC errs toward over-assessing PAYE liability. Taxpayers are then able to claim overpayments by way of a tax rebate at the end of the fiscal year.

The taxman has asserted that it will do away with this system in favor of a simpler process that will ensure that inputted data is timely, to reflect correct taxpayer data as individual liability alters.

David Whiscombe, partner, BKLTax, and member of UK200Group tax panel, commented:

“While it’s always popular to knock HMRC for getting it wrong, this isn’t what’s happened in this case. The simple fact is that the PAYE scheme was never designed to cope with the complexity of today’s tax system. The systematic errors reported over the weekend aren’t new, it’s just that the introduction of a more sophisticated computer system has brought them to light for the first time.”

“The question to ask is not ‘why does HMRC keep getting it wrong?’ but ‘how can we simplify a tax system which is collapsing under the weight of its own complexity?’ The first step has been taken with the creation of the Office of Tax Simplification, to whose deliberations the UK200Group is delighted to be contributing. The opportunity it offers to give us back a tax system that works must not be wasted.”

Will Abbot, Partner, Randall and Payne said:

“The PAYE system was only ever designed to give an estimated tax deduction, which in most cases is fairly accurate, with the under or overpayments being corrected in later periods.”

“In recent years HMRC has tried to remove people from the self-assessment system by making more use of the PAYE system than it was ever intended for. So, for example, estimated amounts of private pension income, or savings income have been included in the codes. Finally, HMRC has been using the coding system to collect estimates of tax due on income such as property rent on a monthly basis, rather than collecting through the self-assessment system.”

"I believe we are heading towards employers submitting monthly PAYE returns online, as already happens with the Construction Industry Scheme. This may lead to improved cashflow for the Treasury, as it is currently possible for employers to defer payment of some of the PAYE deductions until after the tax year.”

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