It's time to deal with PAYE reconciliation

‘TAX DOESN’T have to be taxing’, so the adverts told us. And, indeed, most people believed them, until autumn 2010 when HM Revenue & Customs started clearing millions of ‘unreconciled’ PAYE records, by producing automated calculations using its new computer system.

Many were stunned that their tax had been miscalculated and that they had, unknowingly, been accruing underpayments or overpayments of tax, sometimes of many thousands of pounds. The impact of clearing the backlog was mitigated by introducing a ‘tolerance’ of £300 for 2007/08, 2008/09 and 2009/10, below which no PAYE underpayments would be collected.

Now, the 2010/11 underpayment run is beginning and the tolerance figure has been reduced to £50. Around 1.2milliion PAYE taxpayers will receive a calculation between now and the end of the year showing that they have not paid enough tax. HMRC says it has already dealt with the majority of refunds for 2010/11.

Given the numbers involved, you are likely to have some affected clients. All P800 calculations should be checked carefully – HMRC’s figures are, from experience, not infallible and, in some cases, might be pure estimates.

Even if the figures are correct, agreeing the calculation might take some piecing together from P60, P45 and other information. This is not helped by the fact that, on most calculations, various sources of employment and pension income will be conflated into a single ‘PAYE income’ line.

Also, reconciling the 2010/11 calculation where this arrives on top of earlier years’ underpayments may be less than straightforward, particularly where the taxpayer has agreed to pay earlier sums by installment or coded over more than one year. It might not be obvious what has been paid already, how much is still outstanding and how the 2010/11 underpayment fits into the picture. The default treatment for 2010/11 collections, for amounts up to the new coding limit of £3,000 (increased from £2,000 by SI2011/1584), will be coding over one year – 2012/13.

An estimated 150,000 of those who have underpaid are older people whose state pension has not been taxed correctly in the past; but HMRC should automatically offer to collect the tax over three years instead of one. These pensioners should have already had their codes corrected for 2011/12, but it is worth checking.

You may well ask if there is anything that can be done to challenge the calculations. Importantly, there is less scope for 2010/11 underpayments to be written off under Extra-statutory Concession A19 than for earlier years, because the concession states that this can only normally be done where HMRC has failed to act upon information within 12 months of the end of the tax year in which it was received. However, this rule does not apply where the arrears have been caused by the same error repeated over two or more years. You should therefore review cases carefully and advise action where appropriate.

The Low Incomes Tax Reform Group website has detailed advice on checking and – where appropriate – challenging the calculations.

Kelly Sizer is a technical officer for the Low Incomes Tax Reform Group – an initiative of the Chartered Institute of Taxation to give a voice to those who cannot afford to pay for tax advice