HM Revenue and Customs: Will you face a towering tax bill?
Thanks to a new system, many PAYE errors are coming to light. We count the cost
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I have yet to meet the person who did not take some satisfaction from Dave Hartnett, the most senior tax official in the UK, making a public apology to the 1.4 million people facing an unexpected tax bill, for mistakes made by HM Revenue and Customs (HMRC).
For over four million people, HMRC's errors will mean that they will receive a cheque averaging £400 each. But another 1.4 million unfortunate taxpayers will soon be facing bills averaging £1,400 each.
But how did so many inaccuracies occur and are there groups of people who are more likely to be affected by the errors than others? Some of my own clients have reported waiting for post each day, anxious to an extreme, in case they are one of those who owe money.
To put the scale of the problem into some context, there are approximately 54 million PAYE records in the UK. Most of these people do not fill in tax returns because all of their tax and national insurance is deducted from their pay packet by their employers. Out of all the people in the UK who pay tax in this way, approximately two per cent have errors in the amount of tax which they have paid.
If Mr Jones has two employers, both of them may have given him his tax-free allowance
This is actually not at all surprising, as the method of calculating how much tax and national insurance you should pay is based on a simplistic and archaic system, derived from a time when everyone had just one job and comparatively simple tax affairs.
In every year there are errors which are picked up; this year the number is particularly high because, ironically, HMRC has implemented a new improved computer system.
The new system enables HMRC to look at individuals who have multiple jobs and bring all their information from the different jobs under one tax record. Previously, HMRC had no simple way of comparing income earned by one person from different employers.
Let us consider an example. Mr Jones is employed as a fireman on a salary of £25,000 per year. Imagine a "far-fetched" scenario whereby Jones had the time to do a second job and was employed elsewhere as a security guard on £30,000 per year.
Each employer would deduct PAYE and national insurance from Jones's pay, but each one not knowing about the other job, may have given Jones his £6,475 tax free allowances on each employment. But the annual tax allowances are per person, not per job.
Additionally, it is most unlikely that either employer would realise that Mr Jones' total income has slipped into the higher-rate tax bracket - both could have charged him tax at the lower rate of tax.
Therefore, when the new computer system brings both of Jones' employments together, it is likely that he will have a tax bill in excess of £3,000 at the end of the year. This will be a most unwelcome surprise for him.
If Jones had filled in a tax return, then the additional liability would have been picked up easily, as the total tax paid would not match the total tax due for that amount of total income. However, as Jones was not liable to submit a tax return - and therefore was prevented by HMRC from doing so - this information and miscalculation went unnoticed, until now.
Similar errors can arise as PAYE coding notices on which the tax calculations are based contain estimated information for items such as car benefits and private health insurance costs.
So, if you have always submitted tax returns, you are unlikely to be affected by these errors and you can sleep easily.
Similarly, if you have only one job, then your risk of any error is very much lower.
However, if you have had multiple jobs, where different employers deduct tax on your behalf, then it is unfortunately possible that you are affected by the errors.
The initial press reports came out in September, when HMRC sent out 45,000 letters as a trial. But the remaining 5.7 million letters are due out in the next few weeks. If you do receive one of these letters, do not panic, but do speak to your accountant, who can check the calculations on your behalf.
One piece of good news is that if the error is less than £300 in HMRC's favour, by concession, you will not be liable to repay the tax.
Geoffrey Hollander is head of tax investigations at Cameron Baum Chartered Accountants & Business Advisers. For further information, call 020 7724 8824