A written ministerial statement about 2007/08 reconciliations, earlier years, and some state pensioners
Readers will remember the PAYE reconciliation exercise which caused something of a media storm back in September 2010. On 11 January 2011 the Exchequer Secretary to the Treasury, David Gauke, made a written ministerial statement which provided an update on this issue.
To recap briefly: last year HMRC used its new NPS (National Insurance and PAYE service) computer to reconcile PAYE records for 2008/09 and 2009/10, resulting in some 6m taxpayers being sent calculations showing either overpayments or underpayments. Our 7 September 2010 news item PAYE ‘errors’ – what’s it all about? explained the issue in detail, together with various subsequent updates (summarised in our 8 October news item on PAYE end-of-year reconciliations).
The 11 January ministerial statement provided six pieces of news. There is some good news – but also bad news for taxpayers who find they have an underpayment in 2007/08. Below we summarise the news, and then provide some Tax Faculty comments.
The Tax Faculty’s Jane Moore appeared on BBC Radio 4 Moneybox last Saturday (15 January) to discuss what the Minister said and what people can do if they find they have underpaid for 2007/08.
1. 2008/09 and 2009/10 reconciliations
By the end of 2010 HMRC had sent out notifications of under- or overpayments in about 90% of cases (and the Tax Faculty understands that HMRC expects to do the rest by 31 March 2011).
2. State pensioners
HMRC has identified some 250,000 taxpayers who received the state pension in 2008/09 and 2009/10 but did not have it included in their PAYE codes. These people have not yet been sent forms P800 (tax calculations) for those years.
Many of these cases are likely to qualify for the tax to be written off under the criteria of Extra-statutory Concession A19 (ESC A19 – see below) because HMRC had the information from DWP which it could have used to get their codes right at the time. Rather than ask each affected person to make a claim, HMRC will not collect any of these underpayments.
3. Earlier years – overpayments
HMRC is working on the reconciliations for years prior to 2008/09. The ministerial statement says that HMRC will work all cases where a taxpayer is due a repayment for earlier years – though it does not make clear how far HMRC will go back (see below).
4. Earlier years – underpayments before April 2007
HMRC is not going to collect any underpayments for years before 2007/08, ie up to and including 2006/07.
5. 2007/08 reconciliations
The bad news for some taxpayers is that HMRC is going to issue demands for underpayments for the tax year 2007/08. Calculation forms P800 will be sent out between now and the end of March to about 450,000 people. Where possible HMRC will include the underpayment in the 2001/12 PAYE code, and it will not collect sums of less than £300 pa (in line with practice for 2008/09 and 2009/10).
6. Tax codes for 2011/12
HMRC is about to start sending out coding notices for 2011/12. It has done a lot of work to correct the problems which led to many wrong codes being sent out last year. There is more information about this in our news item PAYE coding notices for 2011/12.
The Tax Faculty has comments on some of these announcements:
Although the ministerial statement does not say so, we understand that HMRC plans to go back to 2004/05 when making repayment calculations. In fact, in cases of official error HMRC can use ESC B41 and go back further than the usual statutory time limit for claims. We await more information from HMRC on this point.
We accept that HMRC has the power to go back and recover underpayments for 2007/08, and of course it has a duty to collect tax which is correctly due. However – it is a pity HMRC didn’t do the reconciliations a few years ago. Now, a demand for that year may come as a surprise and shock to some people.
An extra problem for 2007/08 is that people may not have their records, given that in many cases the obligation is to keep tax records for 22 months after the end of the tax year. This means that people could quite legitimately have got rid of 2007/08 records after 31 January 2010. We hope HMRC will assist people who no longer have records and where relevant give them the benefit of the doubt.
Going back to an older year means that ESC A19 is more likely to be relevant than it was for 2008/09 or 2009/10 – because the HMRC delay in using information is more likely to fit the A19 criteria. This is even more likely to be the case if the taxpayer has also had underpayments in 2008/09 and 2009/10, due to the same error. So those people who could reasonably have believed their tax affairs were in order may have a good case to get the tax written off.
If the tax cannot be written off, anyone with a 2007/08 demand can ask for favourable payment terms. HMRC has said it will collect the underpayment via the 2011/12 PAYE code but in fact the taxpayer can ask for it to be spread over up to three years, or even written off in cases of financial hardship.
HMRC cannot include arrears of more than £2,000 in a tax code, which begs the question of what happens if the taxpayer already has 2008/09 and 2009/10 arrears which, taken together with 2007/08, now come to more than £2,000? As yet HMRC has not published guidance on this point.
Extra-statutory concession A19
This concession applies where HMRC has been slow to use information to collect tax arrears, and the taxpayer could reasonably have believed their affairs were up to date. It may be very relevant to taxpayers affected by the current rounds of PAYE reconciliations and underpayments. Though note that it is less likely to be relevant to taxpayers within self assessment and/or who had tax agents acting for them.
The text of the concession is reproduced below. Now that a taxpayer may potentially find themselves with arrears for three years (2007/08 to 2009/10), the last part of the concession about repeated mistakes and arrears fro two or more years may be relevant.
A19. Giving up tax where there are Revenue delays in using information
Arrears of income tax or capital gains tax may be given up if they result from the Inland Revenue's failure to make proper and timely use of information supplied by:
· a taxpayer about his or her own income, gains or personal circumstances
· an employer, where the information affects a taxpayer's coding; or
· The Department for Work and Pensions, about a taxpayer's State retirement, disability or widow's pension.
Tax will normally be given up only where the taxpayer:
· could reasonably have believed that his or her tax affairs were in order, and
· was notified of the arrears more than 12 months after the end of the tax year in which the Inland Revenue received the information indicating that more tax was due, or
· Was notified of an over-repayment after the end of the tax year following the year in which the repayment was made.
In exceptional circumstances arrears of tax notified 12 months or less after the end of the relevant tax year may be given up if the Revenue
· failed more than once to make proper use of the facts they had been given about one source of income
· allowed the arrears to build up over two whole tax years in succession by failing to make proper and timely use of information they had been given.