Taxman's payroll plans undermined

The best-laid plans often fall victim to the unexpected and the taxman’s
ambition to become the UK’s payroll agency looks to have gone the same way.

The taxman is currently dealing with the fallout from the PAYE errors which
saw six million people left uncertain of their tax bills after being given tax
codes causing overpaid or underpaid tax.

The mistakes were revealed just weeks after the taxman floated proposals to
reduce future problems by effectively becoming the payroll agency for the UK,
taking on the employers’ job of calculating the tax liabilities of UK workers.
But have the PAYE errors blown this ambitious plan out of the water? The issues
have clearly exposed the frailties of the current system.

The first obstacle to the payroll agency plan is the fact that the current IT
infrastructure for PAYE is not an ageing dinosaur in need of an upgrade – it is
brand new and yet looks like it needs a fix.

When it was brought in last year, the IT system was touted as one which would
cut down on tax code errors, but the latest problems are a clear indication that
glitches still remain unresolved. To load the system with the additional task of
calculating tax deductions from millions of workers with a huge diversity of
employment arrangements does not seem feasible after the current issues.

Looking closer, there are a number of factors that will cause the taxman
headaches as a payroll agency.

Current procedure means HMRC looks at historic tax returns and guesses on
issues such as pension contributions, tax on income savings and private medical
bills to assign tax codes before passing them to employers. The payroll system
would hope to cut out errors in the process by calculating all these things
upfront and using real inputs from employers.

But this would still be vulnerable – people’s circumstances change. It would
be almost impossible for a payroll agency dealing with all those workers to
react in real-time, meaning people would still overpay or underpay tax.

Age of austerity

Another obstacle to the plan is the department – dealing with spending cuts –
would have to invest even more than the £390m originally spent on the current
system to become a payroll agency.

Emma Boon of the Taxpayers Alliance said throwing yet more money at “hugely
expensive IT failures” would not help.

HMRC would then need to factor in the extra funds needed to become a payroll
agency at a time when they have been told to cut costs.

2,000 jobs are going to be cut from the PAYE processing department in the
next few years, which means it faces the daunting task of having to work harder
with less manpower.

The huge raft of problems connected to PAYE are not going to go away if HMRC
becomes the UK’s payroll agency, but viable alternatives to the payroll proposal
are few and far between.

Some compromise must be made. One adviser even called for the profession to
be held partly accountable for allowing the issue to continue unresolved,
calling for tax experts to be more closely involved in working out the eventual
solution. The consultation closes today.

Tale of the tape

Cost of HMRC’s implementing current PAYE system – £390m

6m – the number of people affected

Around 4.3m of these have overpaid and are due a refund, but
1.4m have underpaid and will have to hand over an average of
£1,428 each.

Although more people have overpaid, the total amount to be refunded to
taxpayers is £1.8bn, compared to the £2bn
that is owed due to underpayments.

£300 is the amount the government is prepared to
write off, so those who owe this much or less will be spared the repayments.

This will cost the exchequer £160m.

HMRC estimates that companies wil save a grand total of
£500m if it was to run payrolls