PAYE path needs careful navigation

INDIVIDUAL TAXPAYERS are entitled to rely on HMRC to process their records accurately and on time. Where any individual taxpayer has more than one source of PAYE income, each source generating a separate record, HMRC’s computer systems need to match the records for each individual.

Under the old computer system, which categorised records by employer or pension provider, this was no easy matter and HMRC lacked the staff to carry out manual reconciliations where data was rejected by the computer. Thus many millions of PAYE records went unchecked over a number of years. Of those, some will show that the taxpayer has paid the right amount of tax through PAYE. Others, however, will show an underpayment or overpayment of tax.

The National Audit Office’s latest report on HMRC’s trust accounts states that HMRC is making progress in clearing past years’ backlog of debts and repayments. But HMRC’s failure to do so promptly for past years has led to hardship for significant numbers of people and has badly dented public confidence in the department.

Over the last year, HMRC has shown restraint in allowing old tax debts to be written off where the taxpayer could reasonably have thought their affairs were in order; applying automatic write-offs to pensioners whose state pensions were not correctly coded out; and raising the tolerance from the usual £50 to £300 for two years. While there have been some regrettable exceptions where officers have exceeded their powers and ignored ministerial guidelines, on the whole HMRC’s collection arm has allowed reasonable time to pay outstanding tax and acted sympathetically in cases of hardship.

HMRC is now working hard to do two things: to stabilise the existing PAYE system and to introduce (in 2013) a new way of employers providing data to HMRC on a monthly basis, the so-called ‘real-time information’ project.

The new system will be relied upon to determine not only an employee’s tax liability but also their universal credit entitlement. It will be essential for all old disputes and PAYE data problems to be out of the way by the time real-time information comes on stream. Any unresolved problems could have grave consequences for the unrepresented on low incomes and make the delivery of universal credit fraught with difficulty.

The NAO’s warning, that increasing the volume of in-year taxpayer records while reducing departmental staff could adversely affect the accuracy of PAYE codes, is a salutary one. Furthermore, more frequent PAYE data collections could place yet greater burdens on employers, especially small and micro-businesses unused to dealing with HMRC online.

The anticipated win-win situation coming from these two major initiatives could easily turn into a lose-lose unless the existing PAYE system is working very smoothly before the radical change of real-time information is introduced.

John Andrews is chairman of the Low Incomes Tax Reform Group (LITRG)