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'Attacks' on HMRC over PAYE are unfounded, say tax experts

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Attacks on HMRC for making 5.1m ‘errors’ in people’s tax for 2011/12 are unfounded, the CIOT’s Low Incomes Tax Reform Group has warned. HMRC announced last week that around 3m taxpayers were about to receive tax refunds, ‘two months earlier than last year’. The annual PAYE reconciliation was ‘starting earlier than ever before’, the department said.

But The Times reported that up to 1.6m people would be ‘hit with an unexpected tax demand averaging £537 after they were charged the wrong amount by HMRC’. A Daily Mail headline said 1.6m people would owe HMRC £537 ‘thanks to blunders’.

HMRC had pointed out that the reconciliations were a normal part of PAYE processing. Around 85% of taxpayers had the correct amount of tax deducted from pay during the year, but adjustments were needed for the other 15% to take account of changed circumstances such as a new job or a gap between periods of work.

Real Time Information (RTI) – currently being piloted by HMRC and ten employers, with a further 310 employers set to join by the end of June – would make it easier for employers and pension providers to administer PAYE, HMRC said. ‘They will tell HMRC about PAYE payments at the time they are made – as opposed to only at the end of the year – reducing the need for corrective actions at a later stage.’

However, for 2011/12 up to 3.5m taxpayers who have overpaid tax would receive an average repayment of £379. Up to 1.6m ‘will need to make up an average £537 shortfall in their tax, as they have underpaid during the year’. HMRC said most of these underpayments would be collected through the PAYE tax code.

LITRG Chairman John Andrews said PAYE ‘does not, and was never intended to, collect the right tax in all cases during the year’. There was always a need for HMRC to make an annual check.

‘The biggest difficulty for the PAYE system is the millions of changes that happen during any year which have to be captured and reflected in the PAYE codes,’ he said.

‘How close the system gets to collecting the right tax depends very much on the quality of data it receives. Error or delay on the part of the employer, pension provider, taxpayer, the DWP or HMRC all compromise accuracy. And sometimes the system cannot process changes until some time after they have happened.’

The RTI project would require employers to be more accurate in the information provided to HMRC, Andrews noted. ‘Another development will allow some taxpayers to change their own details online, which will capture change quicker than current methods.’