HM Revenue and Customs have announced that millions of taxpayers will get letters in the second half of this year telling them they have paid the wrong amount of tax over the 2010-11 tax year. The CIOT's team of experts have put together this helpful Q&A explaining what it's all about and what you should do if you get a letter.
PAYE Reconciliation - questions and answers
What's going on?
The annual end-of-year 'PAYE reconciliation'. Through the year most people pay income tax and national insurance by having it deducted from their wages (or other income such as a pension) under the Pay-As-You-Earn (PAYE) system. This usually works fine if you have one source of income through the year, but if you have multiple income sources, move in and out of work through the year or receive benefits in kind (e.g. a company car) it can get complicated and you can end up paying too much or too little tax. The reconciliation process is when HMRC look at all the information they have on your income and tax over the past year and, if necessary, send you a demand or a refund.
HMRC estimate that 1.2 million people will get a tax demand for the 2010-11 tax year and between 1.7 and 3.5 million people will get a refund. Letters informing people of refunds will go out first, starting in July, with demands going out from September.
There is a more detailed explanation in this article on the newsdesk of the CIOT website.
Why have so many people paid the wrong amount of tax? Whose fault is it?
In most cases there is no ‘fault’. So long as PAYE exists, there will always be a need for a reconciliation process, as there will always be some people with unpredictable incomes or whose circumstances change through the year.
However in some cases errors may be due to taxpayers or their employers not informing HMRC they have a second job when they should have done and so getting a tax allowance two or more times, and/or paying basic rate tax on two jobs when they should have been paying higher rate tax on at least part of one of their incomes. And in some cases it may be HMRC’s fault, if they had this information but failed to process it or match it up (though this should be less of a problem with the new integrated computer system than it was under the old system).
Although 2.9 to 4.7 million is a lot of people, even if the top of this range is hit, the number of people getting under or overpayment letters from HMRC will be fewer than last year's 5.7 million (though that was for two years processed together).
So this isn't another 'HMRC blunder’?
No. PAYE sorts most things for most people, but end of year reconciliations (and self-assessment) are always going to be needed to finalise the tax situation of a lot of people. People need to take an interest in their tax situation, especially if they are moving in and out of work or have multiple or erratic sources of income.
That said, HMRC’s systems are a long way from perfect and there will undoubtedly be people in the reconciliation process who will feel legitimately aggrieved that, if HMRC had processed their correspondence promptly and accurately, they would have paid the right amount of tax in the first place.
Will I get a letter?
HMRC say more than 80 per cent of people who pay tax through PAYE have paid the right amount of tax through the year and will not get a letter, so the odds are against it. But if you have income from multiple sources (including from a number of different pensions - a lot of those affected will be pensioners) and/or your circumstances changed during the year then you may well get a letter.
What should I do if I get a letter?
Read it carefully and check the figures! The letter (technically a P800 form) represents an informal calculation only, not a demand for tax. That may not be immediately obvious. If the calculations are not understood they should be challenged and HMRC asked for a detailed explanation of how they were reached. Make sure you check which year the calculation is for as there are still a few reconciliations from earlier years outstanding.
If you have underpaid tax and you think it was your employer’s or pension provider’s fault for not operating the code given them by HMRC correctly or through making some other mistake, then in strict law HMRC must first call upon your employer or pension provider to make good the shortfall. (See the underpayments section of this article for further explanation.)
If the letter tells you that you have overpaid tax and are due a refund you should still check the figures carefully. HMRC can over-repay tax just as easily as under-collect tax, and their penalty system works both ways – if they think you were careless in not spotting the over-repayment, they can charge you.
There is further information on all of these points in a guide on the website of the Low Incomes Tax Reform Group (www.litrg.org.uk, then click on ‘PAYE underpayments’). Currently this is for last year’s tax underpayments but it will be updated by the time this year’s underpayment letters go out.
What about if I am on benefits?
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 you receive depends on your net, after-tax, income. So, while you might owe more tax, you may be able to get it reimbursed in full or in part.
Will I have to pay up at once if I owe money?
No. Standard procedure is for HMRC to ‘code it out’ over the next financial year (i.e. 2012-13 for the forthcoming batch). This means paying a little extra tax in each month of the year. If someone feels this will cause them hardship they can ask to have it taken over a longer period of up to three years. Taxpayers should resist any attempts to force them to pay in a lump sum within 30 days or less (such tactics have unfortunately been observed over the past year).
What is ‘extra-statutory concession A19’ and can people still use it?
ESC A19 states that where there are delays by HMRC in using information, HMRC may write off tax arrears owing to it. However the speedy circulation of the 2010-11 tax underpayment letters means it is unlikely to apply to many recipients.
It will only apply in relation to this year’s 2010-11 reconciliation letters if the Revenue both “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”.
This might in some circumstances apply to people with arrears going back over two or more years (e.g. 2008/09 and 2009/10) where the same failure to use information appears also in 2010/11. Where there are still underpayments due for 2008/09 and 2009/10, HMRC should have automatically written them off if they arose because the state pension was not properly reflected in the code. The same principle should apply to any other taxable state benefit (e.g .taxable incapacity benefit or ESA) but they will not be written off automatically – the taxpayer has to apply for ESC A19 treatment in those cases. (Again, see www.litrg.org.uk for more information.)
What will be the impact of the proposed reforms (RTI, personal income tax ‘accounts’) to PAYE?
HMRC has set out plans to require employers to submit PAYE information to HMRC on a week to week basis (‘real time information’, or RTI) as part of the regular employer/employee payment process. The aim is to reduce administrative costs for both employers and HMRC. Provided it works effectively – and the CIOT has expressed concern about the haste with which it is being introduced – it should mean far fewer tax under and overpayments, but there will still be a need for a reconciliation process at the end of the year.
Where can I get further advice from?
First read the guide on the Low Incomes Tax Reform Group website (www.litrg.org.uk, then click on ‘PAYE underpayments’) and the article on HMRC's new announcement on this website. 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 (if you are a pensioner) or Tax Aid, both charities supported by the CIOT.
CIOT External Relations Manager
Wednesday 29 June 2011