As lots of you will have come across in the media, a recent audit of HMRC’s systems revealed a huge problem in their Pay As You Earn (PAYE) system.  This ‘problem’ has unfortunately resulted in a significant number of taxpayers paying the incorrect amount of tax under the PAYE system. 

Unfortunately the PAYE system is fairly antiquated (to say the least) because it was designed in an era when people used to stay in the same jobs for long periods of time.  However, times have changed with people having more than one job and changing jobs at a much faster pace than in the past.  However, the PAYE system has not kept up!

A significant number of taxpayers in the UK will not have a problem with their tax position.  However, in some cases taxpayers will be in a better position because they will have overpaid tax in previous years and therefore be eligible for a refund.  Conversely, other taxpayers will not be as fortunate and will receive a notice informing the taxpayer that they have paid too little tax.

HM Revenue and Customs (HMRC) have started sending out notifications (P800) tax calculations for the tax years 2008/9 and 2009/10 from 6 September 2010 and will continue to send out these notifications until January 2011.  Accountants in practice who represent clients will NOT receive copies of the P800 notifications and therefore you are advised to contact your clients who may have received such forms to inform them to contact you if they wish you to resolve the issue.  Conversely if you have an accountant (agent) who deals with such issues, you should contact them if you wish your accountant to sort it out, as they will not have been sent a copy of the notification from HMRC.

HMRC are dealing with this ‘crisis’ as follows:

1.  If you have paid too much tax, HMRC will issue a refund.
2.  If you have paid too little tax and the underpayment is under £2,000 HMRC will include the underpayment in your tax code for 2011-12 so you will pay the underpayment through the PAYE system over that tax year.  You can ask for the underpayment to be included over a longer period if this causes financial hardship.
3.  If the underpayment is £2,000 or more, HMRC will request direct payment.  Repayment schedules can be arranged by contacting HMRC on 0845 3000 627.

Extra Statutory Concession (ESC) A19 permits HMRC to forgo collection in only limited circumstances and these circumstances are largely where they have been provided with the correct information to enable calculation of the correct amount of tax within 12 months after the end of the tax year in which it is received, but HMRC failed to do so.  ESC A19 does not, however, apply to any other circumstances where amounts are in dispute - however if you have received a demand, ESC A19 is worth reading.

Hopefully lessons will be learnt from this ‘crisis’.