Blog

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.

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.

George Crozier
CIOT External Relations Manager
Wednesday 29 June 2011

^{This is number four in a series of articles on this blog from CIOT members exploring different aspects of the Tax Agent Strategy (TAS) consultation. The articles are published in a personal capacity, are intended to stimulate debate and do not represent agreed CIOT policy. Please email technical@ciot.org.uk if you would like to post an article. Comments in response are very welcome. All articles are written by CIOT members but comments may come from anyone.}

One of the myths arising out of the Tax Agent Strategy consultation document is that HMRC want to regulate the tax profession. They Do Not.

HMRC need to know who and where the tax agents are, and if they are a valid business. But HMRC would rather leave the onerous task of regulating and disciplining tax agents to the professional bodies those agents are members of. This begs the question – who regulates those tax agents who are not members of a professional body?

I believe the confusion over regulation has arisen due to the interaction of agent enrolment and self-serve privileges as (poorly) explained in the con doc. Enrolled agents will be able to self-serve, and HMRC want all paid agents to become enrolled eventually. However, HMRC will retain the option to switch-off the self-serve privileges of a particular enrolled agent at short notice, to protect the system against fraud.

The question of how to an agent would lose their ‘enrolled’ status (quite separate from their self-serve privileges), is not adequately addressed in this con doc. It is implied that once an agent loses their enrolled status they will cease to be able to act for clients, and thus would lose their business. The question of who regulates the enrolled agents is key to moving this Tax Agent Strategy forward.

Taxwriter
27 June 2011

^{This is number three in a series of articles on this blog from CIOT members exploring different aspects of the Tax Agent Strategy (TAS) consultation. The articles are published in a personal capacity, are intended to stimulate debate and do not represent agreed CIOT policy. Please email technical@ciot.org.uk if you would like to post an article. Comments in response are very welcome. All articles are written by CIOT members but comments may come from anyone.}

In an article on the CCH website Trevor Johnson has likened the Revenue’s ‘self serve’ plans for tax agents to a ‘Tesco’ tax system, with an automated checkout and the whole process able to be completed without the involvement of any member of the store’s staff.

Being positive and using Trevor’s analogy, I hope it will be more like Waitrose than Tesco (and not just being snobby – they have a good self-serve model) –
• you self-serve (by scanning your food as you go round and pack it just as you like)
• though the actual process takes a bit longer (i.e. scanning each item as you put it in your trolley – especially if your other half is with you and hogs the scanner)
• but overall you save significant time, hassle and effort (no going through check-outs and repacking goods – unlike some self-serve shops)
• and much of the their saving has clearly been invested in:
o good systems (reliable hand scanning system),
o good quality and value product (never knowingly undersold) and
o redeployed and well trained staff who can provide a good service if you need it.

If there is a problem (e.g. something won’t scan because it is on that week’s ‘list to check’) helpful staff will get you back on track when you pay. Otherwise you just pay as you leave and walk out of the shop without having to even speak to a member of staff. In fact you feel so unusually trusted you almost feel like you need to wave your receipt around as you leave.

The enrolled (you have to have a John Lewis card to self-serve) are occasionally checked up on (i.e. sent to a checkout to have all your goods rechecked) and that is a pain – especially if you are in a hurry – but it’s the occasional price of an otherwise speedy service. If you make the odd genuine mistake they just adjust your bill with little comment.

You cannot really totally abuse the system if enrolled (e.g. if you walk out without paying) as they know who you are and have your John Lewis credit card details so can get you anyway.

They know what is normal for you – and even ask if they have done anything wrong if your habits change significantly - scary!

And if you abuse the system (by not scanning everything) and they catch you they’ll refuse you access to the system – but I’ve never heard of it happening to anyone who just made the odd genuine mistake. As for disenrolment – well it is Waitrose’ final decision, but then you can always shop at M&S or Tesco – with HMRC there is no alternative – which is why everyone is twitchy and wants some independent oversight here.

And the ‘unrepresented’ can still shop there and go through the tills – where the queues are much shorter than in most shops.

If we agree to this then I think we have to push for the Waitrose model. The secret is they trust their customers, who in turn are honest back – like the market trader who realised he spent too much time handing out change so just put a pot of change on his counter and told customers to help themselves when they overpaid. His queues were cut, his customers increased, they were happier and his turnover and profits rocketed!

TG

Friday 10 June 2011

There was an interesting debate on tax avoidance on Radio 4 on Wednesday night.

It was the first of a new series of ‘Decision Time’, a show in which the BBC’s Political Editor Nick Robinson “goes behind the closed doors of Westminster and Whitehall to ask how controversial decisions are reached”.

For this first programme he was joined by Green MP Caroline Lucas (who has a private member's bill on tax avoidance), Lord Digby Jones (former Trade Minister and former head of the CBI), Sir Nicholas Montague (the last head of the Inland Revenue), Michael Jacobs (former special adviser in both the Treasury and Number 10), and Fraser Nelson (Editor of the Spectator).

Digby Jones talked about how the CBI goes about persuading ministers and civil servants of their case. Nicholas Montague discussed the role of civil servants in advising ministers, shedding light on the different sorts of report commissioned by ministers – some designed to come up with a particular solution, and some simply window-dressing.

However the debate ranged wider than simply the mechanics of government, with Digby Jones launching a spirited defence of the role of business in creating jobs, and examination of the distinction between evasion and avoidance.

The panel considered why a proposal for a general anti-avoidance rule (GAAR) fell when looked at in the first term of the Blair-Brown government. Commenting on tax complexity Nicholas Montague observed that, “every loophole blocked is another barnacle on the hulk of tax law”.

If you missed the programme you can catch it until the evening of Wednesday 15 June on BBC iplayer.

George Crozier
CIOT External Relations Manager
Friday 10 June 2011

^{This is number two in a series of articles on this blog from CIOT members exploring different aspects of the Tax Agent Strategy (TAS) consultation. The articles are published in a personal capacity, are intended to stimulate debate and do not represent agreed CIOT policy. Please email technical@ciot.org.uk if you would like to post an article. Comments in response are very welcome. All articles are written by CIOT members but comments may come from anyone.}

There appears to be two strands to the consultation document:

The proposal by HMRC admits poor performance and asks that agents deal with certain aspects of the tax administration system which MAY reduce my time but merely takes us to where the system should be. The cost saving is HMRC's not ours. The saving can be used to offset the costs of enrolment and security systems as opposed to us paying for the privilege of helping HMRC.

The second strand is clearly about HMRC evaluating and judging agent performance resulting in a punishment of some kind and a de facto regulator. Bear in mind if I engage in tax planning which avoids tax am I a good or bad agent? If I disagree with HMRC does that make me a bad agent? I imagine that HMRC could certainly have an alternative view to mine and my clients. There are clearly issues over whether HMRC are competent and able to be independently minded to judge what is a good performance.

Yes I would take the self-serve option and take on board the security issues but I don't see why it should be at my cost. No I will not accept that HMRC are the judge of my performance. I leave that to my peers and more importantly my clients.

In my view and I am sure others I do not think we should engage on this consultation it smacks of poor performance and big brother. HM Revenue & Customs need to think again.

KC

7 June 2011

Over the next few weeks the CIOT’s blog explores different aspects of the proposals, with thought pieces written by different members on the Tax Agent Strategy (TAS) consultation. The views from individual members are to stimulate debate – they are not necessarily confirmed views of the CIOT as a whole. We are very grateful to members who are sending in pieces. Comments in response are very welcome.

An agent’s view of the ‘Agent view’

The HMRC agent strategy consultation paper promises privileges to ‘enrolled’ tax agents such as being able to directly amend clients’ data within the HMRC computer system, and monitoring of tax payments and repayments for clients.

To become an enrolled agent the firm will have to prove it is a genuine business providing tax advice, and give details of the owner’s professional qualifications. These are reasonable requirements.

However, HMRC also want to collect and monitor the intimate details of the enrolled tax agent’s business, including the tax compliance performance of its clients (eg whether the clients submit tax returns and pay tax on time). This data set, called the ‘agent view’, will be used by HMRC to identify agents whose total performance (including the tax compliance of their clients) is below the average standard of agents with similar client portfolios. ‘Targeted support’ will be offered to tax agents who fall below standard, which may include reporting the agent to their professional body.

I believe the ‘agent view’ will undermine the relationship between tax agents and their clients. At best enrolled agents will tend to take the HMRC line in all tax matters for fear of getting a black compliance mark in their ‘agent view’. At worst the agent will refuse to act for disorganised or unlucky taxpayers who can’t submit forms or tax payments on time. This could leave large numbers of taxpayers represented by not-enrolled agents, or not represented at all.

Taxwriter

The CIOT launched its members survey on HMRC’s tax agent strategy (TAS) consultation last week.

Members can access the survey at: http://tinyurl.com/TASqn

The consultation is available at: http://tinyurl.com/TAScondoc

We would encourage all members to respond to the survey – the results will feed into the CIOT response to the consultation and may influence the future of the profession.

Feel free to post your views as a comment to this blog post.

Tina Riches
Director, Technical
6 June 2011