About 15,000 people have received tax bills averaging £1,380 in recent days, as part of the first batch of unwelcome letters going out from HM Revenue & Customs following news of widespread problems with the Pay As You Earn (PAYE) system.
In total, 1.4m individuals will receive letters in the next couple of months informing them that they still owe income tax and National Insurance from 2008/09 and/or 2009/10. The biggest bills will be about £5,000.
However, 30,000 others will have received better news from the taxman this week in the form of calculations telling them they are due tax refunds averaging £420 for the same period. And, overall, about 4.3m people will receive these tax rebates between now and the end of the year.
Why has this happened?
The mismatch between tax deducted and tax owed originates with tax coding notices, the paper slips that the Revenue sends out to individuals telling them how their income will be taxed under PAYE.
Coding notices essentially assume that previous circumstances – workplace benefits, for example – will continue as before. The Revenue might not be aware of changes and might also make mistakes where, for example, someone receives more than one pension – resulting in too much or too little tax being deducted at source.
Where an individual fills in a tax return, these errors should be put right at the end of the tax year. But most people, including many pensioners, do not fill in returns.
Is this about cutting the government deficit?
While cynics might view the latest exercise as an attempt to boost state finances, the Revenue points out that while the total underpayments amount to £2bn, it is refunding about £1.8bn – so the overall amount being collected is only about £200m.
The government also said this week that it has written off bills where individuals owed less than £300.
Who is affected?
Accountants say that many under- or overpayers will be recent retirees, people who receive benefits-in-kind from their employer, or individuals who have changed jobs or have more than job. Those in receipt of more than one pension could also have paid the wrong amount of tax.
Individuals who have under- or overpaid will be sent letters between now and December.
What should I do if I receive a letter?
Check that the new assessment – called a P800 calculation – is correct. If it is wrong, you might owe less tax or be due a bigger refund.
The Low Incomes Tax Reform Group (LITRG) has produced a free guide for those who receive the calculations (tinyurl.com/taxletters), which includes prompts to help challenge the allowances and reliefs given.
It points out that the letters are “an informal calculation only, not a demand for tax”, and if individuals don’t understand they should ask HMRC for more detailed explanations (either via the contact details on their letters or the general Revenue telephone helpline on 0845 3000 627).
If you are told you are due a repayment, this will arrive in cheque form about two weeks after the initial letter.
When will I have to pay?
If the underpayment is for less than £2,000, it will generally be incorporated into 2011/12 tax coding notices which will go out next spring. The Revenue says it will also be prepared to collect the tax owed through coding changes over as long as three years in cases of “hardship”.
Amounts of more than £2,000 have to be paid by January 31 2011 – or incur late payment interest at 3 per cent – although taxpayers can pay off amounts of more than £2,000 and then have the rest “coded out”.
How can I avoid paying?
The Revenue says it “can consider” writing off bills in certain circumstances, under the terms of its Extra-Statutory Concession A19 (see www.hmrc.gov.uk/ esc/esc.htm).
“Basically these circumstances are if we have been provided with all the information necessary to get your tax right and you could have reasonably expected your tax deductions to be right,” it explains.
Individuals need to write to the Revenue asking for a review on this basis.
In many cases, the Revenue might have missed its own deadline for levying more tax – basically 12 months after the end of the tax year in which they received information.
However, the LITRG also warns that “it is not enough that the taxpayer believed” their affairs were in order.
Mike Warburton of accountants Grant Thornton, says that those most likely to be successful in getting their tax written off might be pensioners and those who can argue hardship.
The LITRG, whose guide has sample letters for responding to the calculations, also points out that underpayments could have arisen through employers or pension providers not using the correct codes, in which case they could be liable for the tax.
But isn’t the problem even bigger than this?
There have been reports that the number of tax errors could be much higher, and the Revenue admits to having 17.5m “open cases” for earlier years where PAYE could have been over- or underpaid. It is still manually reconciling tax payments from 2006/7 and 2007/8 which are likely to trigger further bills and repayments.
However, the Revenue claims that its new “joined up” computer system will mean fewer over- and underpayments in future.