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Morning Line: Why should taxpayers pay up for the Taxman's mistakes?

The fact that nearly six million individuals have paid the wrong amount of tax does not instil much confidence in those who have to file their self-assessment forms by 31st October.

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by Lorna Bourke on Sep 06, 2010 at 10:43

Morning Line: Why should taxpayers pay up for the Taxman's mistakes?

The fact that nearly six million individuals have paid the wrong amount of tax does not instil much confidence in those who have to file their self-assessment forms by 31st October and are reliant on the tax man to calculate the correct amount of tax to be collected.

The system is fundamentally unfair since the tax system is so complicated that even a reasonably intelligent person will have difficulty in calculating their tax liability. If they file on or before the due date, HMRC ought to be responsible for calculating the correct amount of tax owing. As it stands at the moment, the tax man calculates the tax liability – but does not guarantee that it will be correct and can come back at a later date and demand more if it has underestimated the amount owing.

It’s about time HMRC accepted responsibility for its incompetence. Some 6 million taxpayers have been incorrectly assessed for tax over the past two year and £2 billion has been underpaid by taxpayers on Pay As You Earn. They will have to find an average of £1,428 each, to be collected via their tax code, probably over the coming year. At a time when family budgets are stretched due to rising household bills and the increase in VAT in January next year, this will put millions of families under pressure.

It’s no use the tax man blaming a new computer system for the errors. Presumably the geeks at HMRC set up the system and whoever is responsible for it not functioning properly should be removed. Spokesman, Paul Franklin admitted, ‘we have to improve accuracy. We’re not happy with how PAYE has functioned.’ Possibly the understatement of the year.

But what about the poor taxpayer faced with an unexpected tax bill? If individuals can be penalised and fined for late filing of returns, surely there ought to be a compensatory penalty when HMRC gets things wrong? Although Treasury minister David Gauke said that the government couldn’t afford to waive the underpaid tax, surely it could afford to ignore all underpayments of, say, £200 where the fault lies with HMRC?

What is even more alarming is that almost certainly none of these six million taxpayers had any idea that they had paid the wrong amount of tax – whether it is too little or too much – because the vast majority of individuals find the tax system so complex that they are unable to work out what their liability should be. But HMRC says it is the individual’s responsibility to check that the correct amount of tax has been paid and that their PAYE coding is correct.

The only good news is that there are more people due a rebate than there are taxpayers who have underpaid. Some 4.3 million individuals will receive an average of £418 each because they have paid too much tax.

However, there is a little known extra statutory concession called Remission of Tax in Cases of Official Error (ESC A19). This states that arrears of income tax and capital gains tax may be waived if they result from HMRC's failure to make proper and timely use of information supplied by the taxpayer, or in certain circumstances by the taxpayer's employer or the Department for Work and Pensions. The taxpayer must have ‘reasonably believed’ that his or her affairs were in order. Tax will normally only be given up where there was a gap of 12 months or more between HMRC receiving the information that tax was due, and notifying the taxpayer of the arrears.

HMRC’s own guides spell out the concession and how it is applied. ‘Tax will normally be given up only where the taxpayer, could reasonably have believed that his or her tax affairs were in order - and was notified of the arrears more than 12 months after the end of the tax year in which the Inland Revenue received the information indicating that more tax was due, or was notified of an over-repayment after the end of the tax year following the year in which the repayment was made.’

But crucially it says, ‘in exceptional circumstances arrears of tax notified 12 months or less after the end of the relevant tax year may be given up if the Revenue failed more than once to make proper use of the facts they had been given about one source of income and allowed the arrears to build up over two whole tax years in succession by failing to make proper and timely use of information they had been given.’ That is precisely what has happened in this latest blunder. The mistakes have occurred over the past two tax years. It will be interesting to see how many people claim this concession.

Hopefully the coalition government will make reform of the tax and benefits system top priority because when the system is so complex that even HMRC can’t get things right, there is clearly something fundamentally wrong.

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24 comments so far. Why not have your say?

Sauce for the goose.

They should indeed be subject to the same penalties for mistakes, delays and oversights that they exact from taxpayers.

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I am 110% behind the statements made, if the HMRC makes a mistake, PAYE peoples should not be penalised. I have had several run-ins with HMRC, and I reasonably understand the so called system, it is a devil of a job to get the HMRC to addmit and correct their mistakes, I have even found that incorrect publications have been issued by the Revenue.

My point is that PAYE peoples actually pay Tax as they earn it, not a year latter, as self emplyed can do, So HMRC have had the benefit of the TAX as earnt, and if they make a mistake, it ought to be recified at their expense, not at the expense of PAYE peoples.

Clearly the proffessionalism and competancy,does not exist, let alone I suspect the Majority of peples who do not understand the complicated tax system.

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There have always been mistakes on tax codes---I could bore you with personal experiences going back to 1972!!

The last Tory government recognised the Inland Revenue limitations and transferred just about everything to standard allowances---Dear Gordon being a blinkered moron as usual didn't understand and made life very complicated indeed for HMRC and then exacerbated the problem by cutting staff numbers. Make it simple and standard again and the cock-ups will go with it.

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I've had rebates some years and demands for underpayment in others while in the same job. The whole thing is a complete mess, it need to be simple enough so that the ordinary person can understand what their taxcode is and why.

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Everybody talks as though HMRC have their own money. The only money they have is ours. If there is any refund or compensation to be paid it should come out of the wages or pensions. I am self employed. If I make a mistake I suffer not the tax payer. We suffer if they do not collect the right amount and we suffer if the pay compensation.

Sack all the Income tax staff and do away with all income tax and raise VAT on all but esssentials. Sack all DVLA staff and up the tax on petrol.

There that's removed the pin and thrown the grenade.

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Presumably Lorna Bourke can identify this Taxman who is going to pay for all underpayments of tax and at the same time refund all overpayments of tax. What a stupid article.

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The recent dumbing down of HMRC's service to that of a call centre which promises to return calls within 15 days (unless the matter is "urgent", in which case the call will be promised within 9 days) coincides with the Orwellian use of the term "customer" do describe taxpayers.

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JohnC - that's never going to happen a) because it would be too discriminatory to non-earners b) it would lead to too many racketeers earning and paying no taxes but spending in the EU leading to huge issues for retailers. (Actually think there is legislation to ensure relative VAT harmonisation - 22.5% max I think?) c) taxation doesn't work when there are sea changes in approach - it needs to be grtadual change or there's too big an impact on some minority group.

But I agree with the sentiment. My bugbear is National Insurance - heard there was 60,000 people employed administering this tax? There's a saving of c. £1.5bn pa in salaries alone - probably 3-4x that once add the costs of administering, running, assets etc. not to mention the improved efficiencies to business. Stick it on income tax and the system already exists to collect it! We are long ago moved from the notion that NI is collected to pay for NHS, pensions, benefits etc.

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Wrong again, Lorna

It was the humans who made the mistakes, not the new computer system:

"The errors were identified by a new computer system that found widespread underpayments by employers through the PAYE system, which total about £2bn....The problems arose because at the end of each year HMRC manually checked that the amounts deducted in tax and national insurance by employers using the PAYE system match up with the information held on their records. Those checks have now been computerised." (Guardian).

So, are you still of the view that "whoever is responsible for (mistakes) should be removed"? Bye-bye, then!

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John C has the right idea. Unfortunately, it will not work but not for the reasons Al states. Sir Humphrey will always run rings around the relevant axe-wielding Minister.

Why don't we just slap the computer?

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This situation does seem egregious: 20% of paye earners' tax codes wrong in a 2 year period? From what I can understand, the issue arises because the world changes faster than the hmrc bureaucracy can track it.

As someone who builds big computer systems, I really cannot understand why it took so long and cost so much to build the checking system (>300MM gbp).

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timc - you obviously don't work for EDS who write the very expensive and crap software used by HMRC

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The insurers and banks have been held to account for poor record keeping and administration, In general, mistakes are taken on a customer friendly 'own account' basis - forced through by the Ombudsman if necessary.

Why should HMRC operate any differently ?

If the Goverment took accountability for HMRC in this way it would act as a real incentive to simplify the tax system. Simplification to the point where they could actually administer it.

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A little smile for you all. I retired ill ten years ago. I have a few very tiny self employed pensions. This year, my carer has received ten assessments, two demands, one repayment and related to five different tax offices. The vast sums involved? about £200

There's efficiency and competancy for you now!

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Last year I realised I had underpaid and reported this. I paid for the taxmans error and was fined for underpayment. Ignorance is no excuse to the taxman and the taxpayer is liable for any error.

That said, I know many who can barely read(ever increasing) and live on handouts which are well beyond their tax allowance, they will never pay tax and live in comparative luxury. this is the main cause of immigration.

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@ anonymous 2. No I don't. I thought that EDS was kicked out of hmrc some time ago.

I do know something about the hmrc systems and I cannot believe how incompetent the client is to spend money the way that it does. I don't think that the issue is the suppliers, it's the management of the suppliers. There ought to be a zero based budgeting exercise and slicing out of some of the more egregious overspends. I've seen estimated savings of around 20bn pa from such an exercise, although it's possible that the existing contracts and the stupendously inefficient and ineffective procurement process would stop the savings.

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At the end of the day the Government and HMRC haven't a clue. The biggest part of the equation is the unknown costs that will be incurred by the civil (yes they usually are) servants running around like headless chickens in piles of appeals muttering ESC A19 - Who the heck mentioned that?

All those offices that are presently flooded out with unanswered letters stockpiled on their desk - and Data Protection Act requests that take 6 months to arrive with the DPA unit - will just have "loadsapost" to deal with shortly. Of course when I say shortly it probably depends how long it takes them to issue the letters (by the usual 2nd Class Post). Just when you thought it was safe to unblock the letterbox through will pop the sad or good news letter.

Do I see a special unit being set up in some back street office to streamline the appeals and cost the taxpaying public more and more dosh?

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How about a refund on the THREE HUNDRED & SIXTY MILLION PLUS for the computer that does not work ? Plus interest & penalties that should help the deficit. As to getting civil servants to admit a mistake - SILLY US - WE have to pay for it - again.

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Taxpayers always pay for Government mistakes

This situation is no different

Maybe one day people will stop voting for socialism when they finally understand that the Government takes their money and flushes it down the toilet

Maybe this will cause he millions of taxpayers on PAYE to wake up and qestion what they are getting for their taxes

Government relies on the fact that most people are stupid and do not watch their finances or taxes

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I'm afraid you expect too much of the general populace Landlord X. You're a cynical but accurate commentator but as long as most people can play silly buggers on facebook and Twitter and be further lobotomized by the trash on TV they won't get off their arses and give HMRC and the politicians the kicking that they so richly deserve

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@ John Lacy

I agree entirely. Am not cynical - just realistic, unfortunately

We get the Govt we deserve. If people let the HMRC get away with this then we have no cause to complain. Just like all those other areas of the public sector that consume wealth and do not deliver yet we keep voting for more punishment

A mass error on PAYE might - just might - stir people to take action - but then I doubt it....most people will be far more interested in X-factor / footie / Britain's got talent so HMRC will doubtless get away with it

Just don't be like most people, is my advice

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Remember if your going for ESC A19 (writing off your tax debt because of revenue delay) make sure that you haven't forgotten to tell them about your undeclared letting income or capital gains.

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...any undeclared income that individuals may have pales into insignificance compared to the £5 trillion of debt that the Govt has run up with its reckless spending and unfunded public sector pensions...

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Christopher Brown

Feb 11, 2011 at 12:36

Al, I disagree.

VAT is the most efficient tax to administer.

Everyone receives an income. If you receive a company pension it’s taxed!

If you receive a Government pension its means tested.

The only people who are happy to pay income tax are the people who have the means to avoid most of it or the criminal economy who don’t pay any!

As I move into the last quarter of my life (God willing) a fair taxation system for the UK has been much on my mind.

I’ve come to the conclusion that the only fair taxation system for the western economies is Value added. Income tax should be abolished.

In our western market economies we enjoy greater or lesser monetary benefits based on how much VALUE we ADD to the national product.

If you consider the consumable spend of the national average wage earner compared to the higher than national average wage earner. I would speculate that overall spending would be higher in the latter’s household and therefore that household would be paying a greater amount of VAT.

Consider the High earners in the western economies be they Sportsman, Actors, Bankers or Businessmen. Don’t they buy the most expensive products? How much effort do they expend in pursuing Tax avoidance schemes?

How do the western economies levy the non legal (Black) economy?

At least in the European Union, Canada and Australia / New Zealand, when a Drug Baron buys himself the latest range BMW. Mercedes, Bentley or Cadillac, the exchequers’ are collecting in VAT!

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