PAYE tax checks: it’s that time of year again

Every year at this time HMRC embarks on a massive computerised reconciliation process to check that those with PAYE records and not in self-assessment have paid the right amount of tax in the preceding tax year.

Where the department determines a taxpayer has not paid the correct amount HMRC will issue a P800 or a simple assessment letter.

If previous experience is anything to go on, the reconciliation process should be completed by around October/November time.

Reasons for a P800

GOV.UK informs taxpayers:

“You might get a P800 if you:

• finished one job, started a new one and were paid by both in the same month
• started receiving a pension at work
• received Employment and Support Allowance or Jobseeker’s Allowance”

It also states:

“You will not get a P800 if you’re registered for self-assessment. Your bill will be adjusted automatically if you’ve underpaid or overpaid tax.”

While this might be true for the vast majority, occasionally HMRC’s system fails to match a taxpayer’s PAYE with their self-assessment record and instead issues a P800 / simple assessment.

Reasons for a Simple Assessment letter

GOV.UK informs taxpayers:

“You might get a Simple Assessment letter if you:

• owe tax that cannot be automatically taken out of your income
• owe HMRC more than £3,000
• have to pay tax on the State Pension

Checking the tax calculation

The P800 or simple assessment letter will show the taxable income received and paid tax in a tax year, including taxable income from employment (including employee benefits);

pensions (state and private); and state benefits and savings interest.

Watch out!

HMRC makes use of estimated figures, for bank interest or nominal amounts of rental income. For this reason, as well as best practice, the departments’ figures should be checked against third-party documentation including P60s, P11ds, p45s, bank statements or correspondence from the Department for Work.

HMRC will combine income of a similar type into a single line on the calculation.

Where this happens, you may have to contact HMRC to obtain a breakdown, or ask your client to check them in their personal tax account.

What if a calculation is wrong?

Thankfully, in most instances, PAYE usually collects the right amount of tax where you have a stable employment that lasts a complete tax year. However, this might not be possible for taxpayers with more complicated affairs.

For example, where taxpayers:

• have more than one job, pension or are in receipt of a taxable state benefit or other form untaxed income;
• change jobs or retire;
• draw income flexibly from a pension;
• are widowed or lose a civil partner.

Underpayments

HMRC will usually try to collect any tax due through a PAYE coding adjustment.

If the tax amount owed is less than £3,000 HMRC will attempt to recover the tax due from future income paid via PAYE, rather than as a lump sum.

Where a taxpayer’s income exceeds £30,000 HMRC may seek to collect more than £3,000 via a coding adjustment.

The department must consider whether a taxpayer has sufficient taxable income to enable the extra deduction. Furthermore, the department must be mindful that total PAYE deductions must not exceed 50% of a taxpayer’s wage.

While an underpayment is usually recovered in a single tax year, collection can be spread over more than one tax year.  Normally this happens where a P800 is issued late in a tax year. In such instances, details of how the amount is to be collected should be shown on the form.

If HMRC cannot collect the tax through a PAYE code, for example because a taxpayer has left the UK or is not working they will contact the taxpayer to arrange payment another way. Failure to respond is likely to result in HMRC issuing a simple assessment.  This ‘letter’ will contain similar information found on the form P800. It also creates a legal obligation to pay the tax.

What to do if you don’t agree

If you do not agree with the simple assessment it is vital that it queried within 60 days of receipt, setting out the reasons. This can be done by phone or in writing to HMRC. At this stage it is possible to ask for some or all of the tax reported as due to be postponed.

HMRC must respond to the query; if you do not agree with the response you can appeal but be careful there is only a 30-day window in which to make it.

Again, the query can be made by phone, or in writing. You will need to state why you think the assessment is incorrect and provide what you consider to be the correct figures.

While the tax due is in dispute, HMRC might agree not to collect any or all of the tax shown as due.

When to pay

Normally the assessed tax is payable by the 31 January following the end of the relevant tax year. However, if it is issued after 31 October following the year of assessment the due date is three months after the date of issue of the simple assessment.

Payment must either be made online, or by cheque.

Low Income Tax Reform Group (LITRG)

In a recently published LITRG article the champions of the unrepresented drew attention to the three main things to note in respect of P800s and simple assessment letters:

1. It is an informal calculation, not a tax demand

If a taxpayer ignores a P800 which reports tax is due at some point HMRC are likely to issue a formal assessment or even a tax return.

2. Have you underpaid tax?

The 2018/19 tax year was a week ‘53’ tax year. Thus, many of the calculations issued showing 2018/19 underpayments will be correct.

There are still a few things to bear in mind if you receive a P800 that shows you have underpaid tax:

• If it is for an earlier tax year, HMRC may be too late to be collect it.
• Apart from in cases of taxpayer neglect or fraud, HMRC is not permitted to assess tax that fell due more than four tax years previously.
• Therefore, the earliest tax year that HMRC should be looking back to is 2015/16 (which ended on 5 April 2016 and can be assessed until 5 April 2020).
• If the P800 is for a more recent tax year but you think that HMRC have all that time had the information they needed to calculate your tax correctly but have simply not used it until now, you should ask them to consider writing off the underpaid tax – under the terms of ‘extra-statutory concession A19’.

• If you consider the underpaid tax is an employer 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.
• The calculation produced by HMRC is not necessarily the full picture a taxpayer’s

situation. They may not have matched all of their records – for example, they may have missed out a source of income upon which tax was paid.

• HMRC might also have used estimated figures in the calculation. This will not be immediately obvious, so you need to check all figures carefully.

3. Further information

The Low Income Tax Reform Group (LITRG) has a P800 factsheet with contains information on what to do if you think a P800 is wrong or if you think a taxpayer might have difficulty paying any tax that is shown as being due.