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NAO Issues Report Detailing Inaccuracies In UK Tax Collection

by Jason Gorringe,, London

09 July 2007

According to a report published by the UK's National Audit Office (NAO) on Friday, income tax is processed accurately in the majority of cases by HM Revenue & Customs, but errors in processing led to the wrong amount of tax being paid by around 1 million taxpayers in 2006-07.

In the new report to Parliament, the spending watchdog explained that HMRC accurately calculates the right amount of tax in 95% of income tax cases. The total level of processing error is higher than this, but some errors are mistakes in taxpayer records which do not affect the amount of tax payable.

The Department subsequently corrects errors it finds or which are brought to its attention by the taxpayer. Consequently, the remaining errors resulted in an estimated GBP125 million of tax underpayments and GBP157 million in overpayments affecting around 1 million taxpayers during 2006-07.

Taxpayers with complicated tax affairs, such as people on pensions and those with several jobs and sources of income, are more likely to suffer from processing errors which can lead to both underpayments and overpayments of tax, according to the NAO. The average underpayment during 2006-07 was around GBP250 and the average overpayment around GBP290, although some errors led to unexpected demands for repayment of much larger sums.

The report suggested that major causes of error are the increased complexity of processing work, as people change jobs more frequently and the need to process certain cases manually. Accuracy rates vary significantly across local offices, and some offices have achieved improvements by better targeting of workloads to staff skills; better management focus on accuracy; and more sharing of good practice.

The NAO also suggested that HMRC’s projects to automate clerical processes have been successful in reducing levels of error, and that it is managing its performance more effectively.

Sir John Bourn, Head of the NAO, observed that:

"HMRC has improved its processing of income tax returns but there are still substantial numbers of taxpayers who are affected by processing errors. Vulnerable groups such as pensioners are likely to be disproportionately affected. The recommendations in my report will help the Department build on the work already underway to improve the processing of tax returns."

In order to reduce the level of errors in Income Tax payments and taxpayer records, the NAO recommended that HMRC should:

  • Continue to use information on identified errors in the quality monitoring sample of cases to identify and correct other similar cases;
  • Facilitate sharing of good practice by analysing area accuracy rates against the various factors that can influence performance to identify the reasons for the success of better performers;
  • By analysing trends in the monthly data, develop an early warning system for emerging problems, which may require adjustments in workload and resourcing or changes in working practice;
  • As it reviews its targets, adjust its monitoring and reporting of accuracy rates to give a clear picture of the rates achieved, for Self Assessment, PAYE and Income Tax as a whole;
  • Build on the success of recent projects by identifying further opportunities for low-cost quick-win projects to reduce errors. These could include automating specific parts of the process or validating manual checks and calculations; and
  • Separate out more complex cases, which generate high levels of error, for processing by specialised teams that have the requisite skills and experience to process them accurately.

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