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Millions get 'wrong tax' letter after HMRC blunder

By Channel 4 News

Updated on 07 September 2010

As millions of people receive letters from Her Majesty's Revenue and Customs (HMRC) telling them they have paid the wrong amount of tax, experts tell Channel 4 News why the error occurred and how it can be fixed.

Taxpayers await letters after HMRC blunder (Getty)

Earlier this month, Her Majesty's Revenue and Customs (HMRC) admitted that a blunder caused around 5.7 million people to pay the wrong amount of tax through the Pay As You Earn (PAYE) system.

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

HMRC has sent out the first 45,000 letters to people who are affected, around 30,000 of whom are due a rebate, while 15,000 have underpaid tax. The remainder of people affected will be contacted between now and the end of December.

Have you received a letter from HMRC about your tax?
 - Advice from the Institute of Taxation's Low Incomes Tax Reform Group here
 - Advice from a personal tax expert here

Experts said people hit with an unexpected tax demand may be able to refuse to pay up as HMRC could have exceeded its own time limits in which to ask for the money. Under tax rules HMRC must issue demands for underpaid tax within 12 months of the end of the tax year in which it became aware that people had underpaid.

But if people provided HMRC with all the information they needed to get their tax code right, it should have used this information within 12 months of the end of the tax year in which it was received to claw back the extra money.

If HMRC failed to do this, taxpayers can ask for an Extra Statutory Concession, also known as an ESC A19. The latest round of errors date back to April 2008, meaning anyone who alerted HMRC to changes in their circumstances that affected their tax code before the start of the new tax year in April 2009 may be able to cite this clause.

John Whiting of the Chartered Institute of Taxation, who is also an advisor to the government's Office of Tax Simplification, told Channel 4 News people receiving the letters have a number of options.

"People are going to get these letters, quite a lot are going to get an early Christmas present," he said.

"Some are going to get bills. The first thing is that it is not a bill, it is Revenue's data. It could be wrong, it could still be wrong. Should your employer have got it right? Some people may be able to challenge it on that basis.

"Some, if Revenue really had the information and over a couple of years haven't processed it right or haven't responded to concerns, can really challenge and get it written off."

He said people who were worried could get free advice here, from the Low Income Tax Reforms Group, whose members include a number of high-profile tax experts.

Chairman of the group John Andrews told Channel 4 News: "People who are getting these letters are likely to be the poorest section of the community and likely to be in greater need. If you are an 80 year old widow and you get a letter like this, you are more likely to believe the government has got it right and pay up."

The group wants the government to be "more sympathetic" and offer more help to such people for example by giving a longer period to pay.

But Mr Whiting he said he still had faith in the tax system.

"I think we can make a good step forward with the PAYE system and ironically this system, which has given us the problems, once we’re through the teething problems it will - believe it or not - be better," he said.

"Assuming it runs okay, what it will do is check and tie up every year, and that in many ways has been the problem. We haven't had that checking and tying up over the years, we have got an accumulation of problems, people haven't been able to spot them, revenue has not had the manpower to spot them and whoosh, they all come out."

"Don't ignore tax demand letters"
You do always need to check the figures, the tax people are human beings just like we are and make mistakes so make sure they've included all the reliefs you might be entitled to, that they've got your personal allowance right, if you've made charitable payments they're included or pension payments, writes Angela Beech, head of personal tax at Blick Rothenberg.
Check the figures, make sure they're accurate. Have a look at your own records and do check the information they're using and make sure that it's right.

It's not going to be unusual that people, particularly pensioners or someone who's been made redundant, can't afford to make tax payments.

Talk to the taxman, don't bury your head in the sand and think it'll just go away. Contact them, tell them your circumstances and you may be able to come up with a payment plan so you'll pay it off on a monthly basis.

The only thing is they'll still charge you interest for as long as it stays unpaid, but at least you're not going to get the bailiffs at the door or debt collectors, so contact them.

Read more: Angela Beech answers questions on PAYE tax blunder

Scale of problem still not known 
In a further development, Channel 4 News has learned that many more people may have paid the wrong tax as HMRC admitted it still has a backlog of 17.9 million cases to work through.

HMRC also revealed that five million of those cases will be classed as "unworkable" for example because the customer cannot be traced.

But HMRC denied that just because a case is open it does not mean a repayment or payment is due.

A spokesman told Channel 4 News: "It would be wrong to suggest that an open case automatically means a change in the tax position, as many of these will simply be that an out-of-date employment record exists for a customer, so no tax is due as the customer no longer receives income from that source.

"This means that the only action required is to manually close it. We began clerically working through open cases in June 2010 to ensure our new system is as accurate as possible." 

The problems are thought to have happened because at the end of each year, HMRC checks that the amounts deducted in tax and national insurance by employers using the PAYE system match up with the information held on their records.

In the past, this was done manually on a case-by-case basis, but a new computer system has now been introduced to automate the checks.

Tax Q&A
When do people find out whether they have over or underpaid tax?
HMRC is writing to those involved between now and Christmas. The first letters should arrive today.

Who is likely to be affected?
You might have under or overpaid tax if: your employer used the wrong tax code, you started a new job and had an emergency tax code for a while, you only worked for part of the year, you had more than one job at the same time, you didn't tell HMRC right away about changes to benefits you got through your work, your circumstances changed - perhaps you were made redundant or became self employed and therefore your income reduced, other income like investments or rental income reduced but you didn't tell HMRC or HMRC made a mistake with your tax.

Over what period will people be paying the money back?
Most people will have any underpayment taken out via their tax code during the next tax year - 2011-12.

Does everyone have to pay back the money?
HMRC can consider writing off the underpayment in certain limited circumstances. Basically these are if HMRC had been provided with all the information necessary to get their tax right and the taxpayer could have reasonably expected their tax deductions to be right. In these circumstances they need to contact HMRC and ask for the underpayment to be reviewed on that basis.

What if someone can't afford the repayment?
Talk to HMRC - it says it will do all it can to help if some one genuinely can't pay.

What happens if someone refuses to pay?
If a tax debt is legally due it should be paid. Again, HMRC says those with any concerns should talk to them.

How far back will the taxman look?
The current reassessments refer to the past two tax years: 2008-9 and 2009-10. If, however, you believe you may have underpaid tax in earlier years, HMRC told Channel 4 News they will reconsider your case on demand.

What advice does HMRC give to people who are worried about whether they will get a letter?
There is no need to worry, best wait to hear from us, read the letter very carefully when it arrives and contact us with any questions.

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