This week HM Revenue and Customs had to confess that nearly six million people in the UK have either underpaid or overpaid on their taxes during the previous two years. Unsurprisingly, this has been cited by many as further proof that the current UK tax system is both deeply flawed and overly complicated.
It has been labelled by some as the biggest PAYE error of all-time, with 4.3 million workers owed £1.8 billion in overpaid tax and 1.4 million having to find £2 billion which they have been undercharged. In the months ahead, many households will receive cheques for hundreds of pounds owed to them by the Revenue. However, many others will find themselves at least £100 a month worse off as the Revenue changes their tax code to try and claw back the money owed.
The situation was recently uncovered by Treasury ministers who had asked the Revenue to check its PAYE numbers. What emerged from these investigations was a legacy of shortfalls and mistakes caused by Gordon Brown’s regular tax code changes, along with a lot of careless human error on the part of the HMRC. Writing off the debts was considered, but it seemed unacceptable that under-payers should be let off and leave the rest of the workforce to make up the shortfall.
The Exchequer announced that the majority of those who have underpaid will need to repay around £2,000 in 2011. This is not a small amount and could have a big effect on their finances next year. However, these errors date back to 2008 and rules clearly state that if tax authorities received all the necessary information in order to assign a correct individual tax code, the HMRC should have used these details within 12 months of the end of the tax year. This will likely leave the HMRC open to appeals from many who have underpaid and they are likely to be successful in this appeal.
This latest fiasco may speed up the plans for complete reform of the PAYE system we mentioned last month in the newsletter. However, judging by the track record of the HMRC, many are less than enthusiastic about giving the Revenue their bank details then trusting them to make the correct deductions and pass on their salary each month.