Backgrounder: Months of PAYE problems

MILLIONS of people have paid the wrong tax, with many to be notified by HM Revenue & Customs this weekend.

The revelation is the latest chapter in what has been a tale of long-running and fundamental problems in the tax system.

Six million cases have been identified where overpayments have been made, with the taxpayers set toreceive £400 per case. However, an announcement earlier this year confirmed that 1.2 million people will owe an average £600.

The discrepancies have come to light as the taxman beds in its new PAYE IT system, and relate to the 2007/2008 tax year, and previous years.

Underpayers will have the opportunity to pay back the money through another alteration in their tax code, rather than being forced to hand over a lump sum.

"Money that is owed going back many years is now going to be automatically paid back as we get the tax system up to scratch," said an HMRC spokesman.

"We are getting cases that were left unreconciled up to date as quickly as possible. Anyone owed money will be paid back with interest without the need to contact us.

"The fact is there will always be some cases at the end of every tax year that require an under or overpayment to balance but these cases will reduce as the new system beds in."

Last year, around six million were told they had paid the wrong amount of tax.

Margaret Hodge, chairman of the Public Accounts Committee, had said that last year's reconciliations showed HMRC had "failed in its duty to process PAYE accurately and on time".

In November, Bernadette Kenny, who had presided over PAYE during last year's crisis, announced she was leaving the department after five years.

The taxman had agreed to write off the debts for those who owed less than £300, but this was reduced to £50 for the estimated 1.2 million underpayers for the 2010/2011 tax year.

HMRC chief executive Dame Lesley Strathie had warned that resource cuts would hamper attempts to resolve what were estimated at nearly 18 million pre-2008 PAYE reconciliation cases, by 2012.

Accountants also spoke of their struggles to help clients' have their PAYE debts written off by using an extra statutory concession.

Last week 146,000 pensioners were told that they face a tax underpayment for the 2010/2011 tax year.

Another big concern is that HMRC's move to real-time PAYE information, for employers by October 2013, is too tight considering the scale of the exercise.

In a recent consultation which saw 187 respondents, 75% said the plan was unachievable in the timeframe.