INLAND REVENUE

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The taxman could owe millions of British workers as much as £3 billion in overpaid taxes dating back to 2007-08 and earlier. And a backlog of underpaid taxes from four or more years ago could lead to HM Revenue and Customs demands for an extra £1.4 billion from taxpayers, said spending watchdog the National Audit Office. The problem could affect as many as 15 million people, many of whom may not know that they are facing additional tax demands or due repayments which could run into thousands of pounds.

The NAO said the backlog was caused by the introduction of a new computer system which was intended to combine National Insurance and PAYE income tax payments into one record for the first time. By the time of its implementation in June 2009, the system had been delayed twice, leading to a backlog of 18.2 million unreconciled cases involving 15 million people, said the NAO report on HMRC's annual accounts for 2009-10. HMRC's early analysis suggests that around half of these cases, about 9 million, are likely to involve incorrect payments, which could lead to £3 billion in overpayments and £1.4 billion in underpayments.

The NAO found that the delays were 'justified' as the system was not ready to go live earlier. But the slippage resulted in an additional cost of £33 million and the loss of £55 million in planned efficiency savings. Changes to system requirements added a further £78 million, bringing the total cost of the project, expected to save £532 million over five years, to £389 million. The report said that the task of clearing the backlog remains 'a very significant challenge', and it warned that the sums involved are 'substantial' and could come as a surprise to the taxpayers affected.

The NAO was also critical of HMRC's performance in recovering overpayment of tax credits totalling £4.5 billion. Error and fraud resulted in incorrect tax credit payments of an estimated £1.95 billion to £2.27 billion - out of a total £27.3 billion, in 2009-10. There was evidence that a new HMRC strategy for reducing error and fraud was delivering positive results, preventing an estimated £569 million in overpayments over the course of the year, said the NAO. But Revenue and Customs' performance in reclaiming overpaid money did not improve, and the total tax credit debt rose by around £100 million over the 12 months to March to reach £4.5 billion.

The tax authorities improved their overall performance on collecting debt, with unpaid amounts decreasing by £1.6 billion to £26.1 million, the report found. The recession resulted in a £5.9 billion (1.3%) fall in total Government revenues from taxes and duties, which were down to £435.1 billion. Auditor General Amyas Morse said, "The department has not made enough progress in reducing the backlog of 18.2 million income tax cases where there is potentially overpaid or underpaid tax. It also needs to improve its collection rate for tax credits debt, which is substantially lower than that for tax debts."

He added, "The administration of tax in 2009-10 by HM Revenue and Customs has been influenced by three broader issues: the recession, which has increased the value of tax debt to be recovered; the pressure on the department to streamline its processes; and the effectiveness of its information systems. Those systems need to be developed so they improve the department's ability to monitor and assess the targeting and performance of its debt collection campaigns and to design future interventions in the areas of greatest risk."

An HMRC spokesman said, "We have a lot of work to do to deliver the quality of service to which we are committed. Just like every government department, we are going to have to do more with less and today's report will help us to focus on those areas of our business that need to improve. We welcome the NAO's view that the decision to defer our new PAYE system was justified. Implementation of the new system was a major undertaking and will deliver significant benefits for our customers. The report also acknowledges that our new approach to tackling tax credit error and fraud has yielded positive results. Building on that success, HMRC plan to go further in tackling and preventing error and fraud this year to meet the target." (Source: Daily Mail, Jul/10)

Around 1.4million Britons are being urged to stage an unprecedented revolt over plans to claw back up to £3.8billion in under-paid tax. It follows the botched introduction of a new computer system by the taxman which has left millions of bills in chaos. The first batch of 45,000 letters demanding cash to be repaid will start to arrive over the next four months. But accountants said recipients should act swiftly to use a little-known loophole which forces HM Revenue and Customs to abandon 'out of the blue' demands and effectively write off the money.

They also insisted many of those affected are entitled to argue that they or their employer have done nothing wrong and should not be penalised for someone else's blunder. The advice has been issued after last week's admission by HMRC that it has claimed too little, or too much, tax from 5.7million individuals. As far back as February an investigation exposed how the Revenue had known for months that the new tax code system was heading for chaos, but failed to stop it.

The majority of those affected by the chaos, around 4.3million, will be winners, and can look forward to an average rebate of £419. But around 1.4million face paying an additional bill, at an average of an extra £120 a month, or £1,428 in total. This is a significant sum for all but the richest in society, equal to nearly a whole month's take-home pay for the average worker earning £25,000. To make matters worse, the money must start to be paid back from next April, when tax rises, such as National Insurance, are set to kick in, tax credits are cut, and VAT has just shot up to 20%.

But accountants have revealed that under a technicality, called the 'A19: Extra-Statutory Concession', the law states that HMRC may have to write-off the money. There is no limit to the amount of money which can be written off under this concession. Under the working of the A19 concession, it states HMRC will back down if the victim 'could reasonably have believed that his or her tax affairs were in order'. A 12-month rule also usually applies, which means the tax can be written off if the victim was told by HMRC more than a year after the end of the tax year that information was provided.

Mike Warburton, senior tax partner at accountants Grant Thornton, said, "Most reasonably intelligent people will assume that the taxman has got its calculations right." The current debacle proves that this is not the case, a situation which HMRC is blaming on the introduction of a new computer system last summer. It merged 12 old computer systems which contained details of our incomes, on to one newer system. It meant that millions were given the wrong tax code, which determines what rate of tax is levied and when personal allowances kick in.

Others were given the right code but HMRC mistakenly asked employers to deduct too much or too little money from their pay. In February it was revealed that minutes of meetings as far back as September 2009 showed that officials were aware of problems with the £140million computer system and the likely shambles that lay ahead. Many of the unsuspecting victims will be struggling pensioners whose tax affairs are complicated by several sources of income, such as a state pension, company pensions and savings income.

Others will be those who have two jobs, workers who have recently switched jobs, and those who get a benefit-in-kind, such as a company car. All will have assumed they have been paying the correct amount of tax before the letters start to arrive this morning. The Low Incomes Tax Reform Group accused the department of being ' notoriously reticent' about the A19 loophole. Chairman John Andrews said, "It is important to know that the concession exists." He urged people to treat any letter, particularly the calculation of the underpayment of tax, 'with caution', adding, "It will be by no means certain that they will be correct or should be agreed."

Mr Warburton said, "People are perfectly entitled to claim under A19 concession, and they should do so. I am particularly worried about pensioners, many of whom will feel pressured into paying the bill and then will go without the basics to survive financially." He said taxpayers should write a letter to HMRC stating clearly they thought their affairs were in order, that the letter has come as 'a bolt out of the blue', and they cannot afford to repay the money. Tina Riches, of the Chartered Institute of Taxation, said, "Most people who get the letters will think "HMRC had all the information-I presumed that the tax I was paying was correct". Most people have no reason to think the tax they were paying was wrong."

If an individual submits an A19 concession but loses, they can turn to the free appeal service run by The Adjudicator's Office, which acts as a 'fair and unbiased referee' on complaints about HMRC. Lose again and the HMRC will change the taxpayer's code in order to deduct the money which is is owed. Payments will begin next April and continue for a year. On Tuesday, the Low Incomes Tax Reform Group will publish information on its website (www. litrg.org.uk) about how to deal with the letters and how to submit an A19 concession.

It would cost at least £500 to use an accountant, and the use of their services may prejudice HMRC, which will assume the taxpayer can afford the bill. 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 handover an average of £1,428 each. 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.

Angela Beech, partner at chartered accountants Blick Rothenberg, said, "Those that receive these demands need to think before they automatically pay up. If you had given HMRC information that would have enabled them to adjust your tax code to make sure that you did pay the right amount of tax, then, if the time limit has passed for them to use that information, they cannot pursue you for the unpaid tax." She said HMRC were likely to ask for proof that people had informed them about a change to their circumstances. But she added, "If you have got evidence or know that you supplied information, then you really should consider appealing against the demand to pay."

An HMRC spokesman said, "HMRC can consider writing off the underpayment in certain 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." (Source: Daily Mail, Sep/10)

A backlog of nearly 18million tax errors threatens to land hundreds of thousands more families and pensioners with a shock tax demand. The revelation comes as HM Revenue & Customs faces a revolt over plans to claw back an average of £1,428 from 1.4million taxpayers who have paid too little tax through no fault of their own. But experts fear this figure could be the tip of the iceberg. Many more people could be hit by unexpected tax demands as the Government's tax collectors plough though a queue of 17.8million unresolved tax problems dating back six years.

The details held by HMRC are so scant that the department has no idea how many people are affected, or how much money is involved. The 18million 'open' tax cases occurred after HMRC worked out that the amount of tax someone has paid does not match up with how much they have earned. Every year, a problem occurs with about one in three workers who have their tax deducted by their employer through the pay-asyouearn system (PAYE). But HMRC's £389million new computer system went into meltdown, and the number where the problem could not be solved spiralled out of control.

In 2005, there were 7million open cases. By April this year, there were 18.2million. Since June, a team of 300 tax investigators have been clearing the backlog. When these problems are resolved, a worker may be found to have paid too much or too little tax. Those who have paid too much tax will be entitled to a refund but those who have not paid enough will be issued with a demand to pay more, just like the 5.7million people caught up in the latest HMRC fiasco. Legally, HMRC can go back through six years of tax records to chase workers for money owed.

One of the main reasons for the backlog is that the tax system has not moved with the times, and is better suited to an era when a worker had one job throughout his or her career. Experts believe the old computer system failed to cope with the frequency with which workers now change jobs, or reflect that people may have several jobs or sources of income. Often tax inspectors were unable to find the files they needed. (Source: Daily Mail, Sep/10)

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