Taxman heavily criticised over PAYE fiasco

HM REVENUE & CUSTOMS has been severely criticised by the Commons Public Accounts Committee over the PAYE reconciliation fiascos of 2008/09, 2007/08 and earlier years, which left an estimated £2bn of tax underpaid and £3bn overpaid.

Chairman Margaret Hodge said it “failed in its duty to process PAYE accurately and on time” and deliberately left taxpayers in the dark until last September because of problems with its NI and PAYE Service (NPS) computer system. The system was intended to bring all of an individual’s pay and tax details into a single record which in theory would increase the accuracy of tax codes and reduce the underpayment or overpayment of tax.

The debacle affected some fifteen million taxpayers, and a failure to understand the impact of the Finance Act 2008 on the deadlines for collecting tax means HMRC is unable to collect £650m, the total estimated underpayment for 2006/07 and back to 2004/05.

Hodge said: “HMRC’s mismanagement has caused uncertainty and worry to taxpayers and inequity in the system. We now look to the department to be able to demonstrate clearly by the end of 2011 that NPS can process PAYE promptly, accurately and efficiently. Taxpayer confidence must be restored.”

The watchdog committee said the “flawed implementation” of the NPS had resulted in long and costly losses and “unacceptable uncertainty and inconvenience” to taxpayers and warned that “data quality issues” had further disrupted the issue of tax codes for 2010/11.

It told HMRC to maximise the revenue collected for 2007/08 before the deadline for collection that year expires, and process 2008/09 and 2009/10 by the end of this month (January 2011).

Its report revealed HMRC began issuing twenty-five million coding notices for 2010/11 without first establishing why the number was massively in excess of its forecast . It had failed to understand the risks of poor quality data, which undermined the effective operation of NPS.

There are ten million cases outstanding where there are data quality issues requiring technical or manual intervention.

MPs also criticised the decision to raise the threshold for the recovery of underpayments from £59 to £300 for 2008/09, foregoing £160m in revenue, on grounds of inconsistency and lack of equity between taxpayers.

Related reading