The reconciliation process involves checking the PAYE tax deducted against income taxable under PAYE and to determine any differences. While around 80% of taxpayer records are expected to reconcile (ie have paid about the right amount of tax) the remainder will have paid too much or too little tax, usually because their circumstances have changed during the year. In such cases HMRC will send the taxpayer a P800 tax calculation.
This is the second year that HMRC have used the automated end of year reconciliation functionality of new National Insurance and PAYE Service (NPS) computer system. In the past these reconciliations were done manually over a period of time (or not at all) – often resulting in significant backlogs of work. We understand that the issue of the P800s follows extensive testing which HMRC say has gone well.
HMRC intend to deal with repayment cases first, issuing the P800 tax calculations from the second half of July until the end of September. It is expected that up to 3.5m taxpayers will receive such a notice.
HMRC say they will then deal with underpayment cases, issuing their P800 tax calculations by the end of December to allow time for taxpayers to query or object to the calculation before the start of the 2012/13 annual coding notice programme.
For most taxpayers the underpayment will be included in the 2012/13 tax code. This is expected to be part of the usual annual cycle – with underpayments for one year being coded out in the year after next.
In cases of financial difficulty, taxpayers should contact HMRC who say they can make alternative payment arrangements. We understand this may involve spreading the underpayment over two or three years.
Underpayments under £50 should not usually be collected (the ‘tolerance level’). Last year the tolerance level was temporarily increased to £300 for 2008-09 and 2009-10 because of the number of calculations HMRC expected to produce and to best manage the process operationally. For 2010-11 the tolerance has reverted to £50; HMRC indicate that this is a sign of restored service and that they do not have the justification for a higher tolerance as they did last year. The tolerance will remain at £300 for the years 2007-08 to 2009-10.
If an underpayment has arisen because an employer or pension provider has under-deducted tax by failing to operate PAYE correctly, HMRC should seek reimbursement from the employer or pension provider. In the past they have tended to demand the unpaid tax from the taxpayer, which is contrary to the PAYE regulations. The employer or pension provider may not have to make good the under-deduction if HMRC are satisfied that they took reasonable care to comply with the regulations and their failure to deduct the correct amount of tax was due to an error made in good faith. In that case, HMRC must issue a direction that the taxpayer must pay the tax instead, and the taxpayer has a right of appeal against that direction.
HMRC have assured us that they are in a much better position on PAYE than last year and are starting the EoY process several months earlier than in 2010. The annual coding exercise had a much higher accuracy rate compared to the issues that arose in the previous year – although the CIOT is aware that some problems remain. HMRC also indicate that they are more up to date in dealing with PAYE type correspondence.
Issues to watch out for
• These reconciliations are part of the normal PAYE annual process – the introduction of Real Time Information (RTI) should eliminate many of them in due course.
• PAYE results in most people paying about the right amount of tax. However it cannot cope with all circumstances – the EoY reconciliation process or self assessment will deal with most of the rest.
• Represented taxpayers in receipt of a calculation should ensure their agent sees it.
• Otherwise, taxpayers should check it carefully to ensure it includes all their income – especially if HMRC are not aware of any changes in circumstances in the previous year. Taxpayers cannot assume the P800 is correct. State pensioners in particular should check that all their sources of income, including the state pension (which is taxable but not taxed at source by DWP), are correctly shown.
• Calculations for taxpayers who usually receive benefits in kind should be deferred until forms P11D have been processed. However, where a taxpayer receives a benefit for the first time in 2010/11 it is possible, given certain circumstances, that they could receive notification of a repayment followed by notification of an underpayment. It is unfortunate that all forms P11D cannot be processed before the repayment calculations are issued. However HMRC expect these cases to be a small minority.
• Some taxpayers may be eligible to make a claim under ESCA19. However, HMRC have indicated that those who had tax written off in prior years are unlikely to be eligible. State pensioners who were underpaid in 2008/09 because of HMRC’s failure to take account of the state pension in determining their code should have had their underpayment written off automatically, therefore there are likely to be very few to whom ESCA19 may apply in 2010/11.
• There are still a few 08/09 and 09/10 cases outstanding, so taxpayers or their agents should check carefully which year the notice applies to.
• The main reason for overpaid PAYE is moving in and out of work.
• Those who are overpaid are welcome to write earlier in the year, whether by letter or Form R40, to claim a repayment.
• Taxpayers who are on means-tested state benefits and who are notified that they have underpaid tax in 2010/11 should contact the DWP, as the amount of benefit they receive depends on their net, after-tax, income.
Any CIOT members who encounter problems with the new EoY reconciliation for clients can send anonymised details to the CIOT at firstname.lastname@example.org. We will take up any significant generic issues with HMRC.
Note to individual taxpayers
We regret that the CIOT does not have the resources to advise individual taxpayers. For further information on this area we recommend reading the guide on the Low Incomes Tax Reform Group website (www.litrg.org.uk, then click on ‘PAYE underpayments’). If, after reading this, you think you need to get professional advice you can find a chartered tax adviser local to you here. If you are not able to afford professional advice then you may want to try contacting Tax Help for Older People or Tax Aid, both charities supported by the CIOT.
CIOT Technical Team
29 June 2011