HMRC ‘didn’t realise records were in the state that they were’
The PAYE coding notices for next tax year – 2010/11 – are being sent out now. But there are many reports of incorrect codings, and HMRC has admitted that there are problems. Taxpayers and agents should make sure they check the codes.
The background to this is that in June 2009 HMRC undertook a major exercise to combine all PAYE records on one computer database, the new National Insurance and PAYE System (NPS). The first annual coding exercise undertaken by NPS, for the 2010/11 tax year, has resulted in numerous incorrect codes.
HMRC says on its website that the vast majority of coding notices will be correct but there will be cases where people receive an incorrect coding notice or more than one coding notice for the same employment. HMRC apologises for this and asks taxpayers to check the codes they receive carefully and tell it about any errors so that the correct PAYE codes can be issued in time for the start of the 2010/11 tax year.
The idea of NPS is a good one and should result in taxpayers’ personal allowances and tax rate bands being allocated in a sensible way where they have several PAYE sources of income. However, the Tax Faculty had always expected that the annual coding exercise would a major test of NPS and it is disappointing that the system has not performed as well as HMRC would have liked. From the information received from members and elsewhere, it would appear that the errors fall into three main categories:
1. 2008/09 data used and subsequent changes to circumstances ignored
Many of the errors in codes have occurred because, although HMRC is aware of subsequent changes to circumstances, the PAYE codes being issued for 2010/11 are based only on 2008/09 data. We had been under the impression from our discussions with HMRC that one of the advantages of the NPS was that it would take into account subsequent changes in circumstances but this does not appear to have happened as far as this annual coding exercise is concerned.
This will predominantly affect taxpayers who:
- draw a pension for the first time after April 2009
- changed jobs or ceased employment since April 2009
- asked HMRC to allocate codes in a particular way following a change in circumstances
HMRC could have saved itself, taxpayers and practitioners a lot of time and avoided a lot of frustration if it had produced codes based on up-to-date data.
2. More than one code for the same employment
Multiple PAYE codes may have been issued to employees who have not changed employer but for whom HMRC has two or more separate records. This may be because the information provided by the employer on the P14 for 2008/09 differed from the record held by HMRC, for example because the employee number was different.
HMRC advised us in the summer that it would be working through its records to correct such anomalies. It appears that this exercise was either not completed or that it was not sufficiently rigorous.
3. Expenses and reimbursed expenses
Many other errors in PAYE codes relate to issues which NPS was not intended to address, for example, mismatches between benefits and reimbursed expenses and the claim for employment expenses. These are, and will continue to be, a perennial problem, as the benefits and expenses information is taken from employer return forms P11D and the information about deductions information is provided by employees (usually in the self assessment tax return).
Bearing in mind that HMRC’s systems for processing information are becoming increasingly automated, employers can help reduce the number of revised code numbers that they receive by applying for dispensations.
What HMRC has said
As noted, HMRC is asking taxpayers to check the codes they receive carefully and tell it about any errors so that the correct PAYE codes can be issued in time for the start of the 2010/11 tax year. There is guidance about PAYE codes on the HMRC website or you can telephone 0845 3000 627.
Claire Merrills of HMRC was interviewed on BBC’s Moneybox Live on Saturday 30 January 2010 and admitted that HMRC ‘didn’t realise records were in the state that they were in’. We find this difficult to understand and consider that HMRC should have done more before issuing codes which would inevitably be wrong.
Furthermore, the Tax Faculty has asked HMRC on numerous occasions to delay issuing annual PAYE codes until after 31 January each year to ease pressure on the HMRC contact centres and on practitioners at a very busy time. Enormous numbers of employees who had received the wrong codes could not get through in January to have them corrected which caused unnecessary worry and frustration.
We shall be pressing HMRC to deal with the issues brought out by this annual coding exercise to ensure that the problems are not repeated next year.