Editorial roundup: Reform must follow PAYE overpayment fiasco

HMRC admitted last week that 4.3 million people were in line for tax rebates because they overpaid a total of £1.8bn in tax between 2008 and April this year.

A further 1.4 million face demands for repayment because they paid too little.

However, HMRC records show that in addition to the 4.3 million cases it admitted to last week, “legacy” errors may have resulted in another 5.8 million people overpaying income tax before March 2008, the Daily Telegraph reports.

Experts said the problem of overpaid and underpaid tax was growing as PAYE failed to reflect the modern workplace and its frequent changes of job, pay and benefits and accompanying changes in people’s tax codes. The recession is likely to make the problem worse.

Good news about tax rebates for up to ten million people, following widespread bungling of the Pay As You Earn (PAYE) system, could be overshadowed by new bureaucratic burdens for four times as many taxpayers, accountants claim, according to the Daily Telegraph's Ian Cowie.

He quotes Chas Roy-Chowdhury, head of tax at the Association of Certified Chartered Accountants (ACCA), as saying: “The remedy may actually be to send everyone a tax return, as happens in Australia and the United States of America. This option may not be very palatable in the United Kingdom but then, unless HMRC’s new computer architecture can sort out this mess, that may be the only choice.

David Prosser, business editor of the Independent, writes that around two-thirds of people receiving letters from the taxman will be told they have paid too much tax and that they are now due refunds totalling £1.8bn.

The tax errors will accelerate plans by the Coalition to overhaul the entire PAYE system, the Daily Mail reports.

A senior Tory source said: ‘Fairness is a big part of this Coalition and it is not fair that many people have overpaid their income tax while many have underpaid.

‘This happened because the last government failed comprehensively to reform the PAYE system. We are now dealing with that mess."

The government is currently consulting on plans to give each employee be given a single computerised tax account which brings together their employment and NI records, giving HMRC real time information of all payments made.

Currently, both employers and pension providers make tax and national insurance payments for employees to HMRC and report them to the tax office once a year. Annually reporting those figures can result in under- and over- payments of tax.

Improvements to the tax system cannot come fast enough to some commentators who accuse HMRC of arrogance and complacency.

"People on PAYE are meant to be able to relax, knowing that the figure in the bottom right-hand corner is theirs to spend. It is a shock to find that the firm ground is actually a swamp and that you owe a mystery sum to the Revenue," Purves writes in an opinion article for the Times, adding: "If the taxman can just climb in through the window of your payslip to remove a random extra sum of his own calculation, you start to feel as if the whole theory of government, outlined above, is shaky."

The taxman credits the £400million system, introduced last year with greater accuracy, saying its computing power has identified many discrepancies between taxpayers’ earnings and tax contributions that were missed in previous years.

However, the computer system has been hit by delays and rises in cost, and concerns about the accuracy of the information it held following an investigation by the National Audit Office, the Whitehall watchdog, the Telegraph reports.

Further reading:

Six million pay the wrong tax