Tuesday, September 7, 2010

The PAYE tax system is now working as it should...

I was invited to appear on BBC 3 Counties radio twice yesterday to explain some of the facts behind the big PAYE tax news story. Sadly I could not get phone reception at either of the appropriate times but here are extracts from the notes I made in preparation for the interviews. I would never have been able to cover all of these points of course:
  • No - this is not a deliberate attempt by HMRC to sting taxpayers as part of a 'let's collect as much money as we can' approach [A suggestion put to me by the researcher who had called]. More people are due refunds than appear to owe money to the taxman anyway.
  • The new PAYE computer system has brought these errors to light. There have always been unders and overs as the PAYE system isn't perfect. This year we know about them all and the new system makes it more likely they will be resolved faster than in previous years. So in some ways its a good news story. HMRC changing their systems to try to get things less wrong than in the past!
  • References to a figure of 10m people due tax rebates are wrong. HMRC have said 4.3m have overpaid in the last 2 years and 5.8m in earlier years. This is likely to be many of the same people.
  • The PAYE tax system has been creaking for years. Not designed for people who change job more than once a year or who have more than one part time job at a time.
  • Many of the people who owe money do so because they have a company car that was not properly taken into account in their tax code. And they probably know this and hoped they would get away with it.
  • References to employers using the wrong tax code for an employee are a touch unfair. Employers use the tax codes issued by the taxman. If it's wrong it's because the taxman didn't have or didn't use the right information. Often the taxpayer hasn't told the taxman everything they need to know.
  • Tax Codes are not something that the taxman and employers can work out between themselves. The taxman tells the employer what to do based on information given to them by the worker.
  • PAYE is a simple idea - Pay as you Earn. It's a way of paying tax by instalments but it can only get to the right figure every year if your affairs are very straightforward. In most cases there will be unders and overs that get sorted out by an adjustment to your tax code the following year. This happens to millions of people every year. It always has done and always will do.
  • To get everyone's tax spot on each year we would all have to file annual tax returns. In fact most people on PAYE don't do this. They can if they want to though....
  • The previous Government added layers of complexity to the tax rules and calculations which the PAYE system was not capable of easily dealing with. (Tax codes can only charge 40% and not 50% tax if someone liable to the top rate has a second job, so they will always underpay tax through PAYE on that second job)
  • Where you owe less than £2,000 any unpaid tax will normally be collected by adjusting your tax code for next year. So again, it's good news. If you do owe tax, instead of being asked to pay it back straight away you'll be given loads of time and the repayments will be spread over 12 months.
  • Only a small proportion of the 1.4m PAYE taxpayers who owe money will be able to use what is being misleadingly called a 'loophole' to avoid repayment of any tax they have underpaid. It's a concession and not a statutory right. ESC A19 only authorises HMRC to write off the debt if the taxpayer can prove they have provided all relevant info and HMRC has evidently not used it AND taxpayer could reasonably have expected their tax deductions to be right.
  • The taxman may well ask for a full tax return for the year before agreeing to write off a tax debt. Do you have any undeclared casual earnings, investment income or rental income?
  • If your affairs are complicated or you have any undeclared sources of income, do take professional advice from a specialist tax adviser before contacting the tax man.
  • You may also want to speak to a tax specialist if you are willing to pay for one-off advice rather than an accountant to help you every year.
Postscript: In the event I went on the show this morning and in 4 minutes of airtime I think I made 4 or 5 of the above points!


  1. Where does Sky get it's experts from?
    The worst I heard this morning was some lady (note Financial Expert and not shown as Tax expert) who first of all said that ESCA19 would be appropriate if the taxpayer had given all their information to their employer and then instanced the potential car benefit missed out of the coding.

    Let's hope that taxpayers don't follow her advice and appeal everything on the basis that they supplied everything to their employer. Sure fired application refusals will follow from that gaffe.

    Only starting points for ESCA19 are
    (a) all information provably provided to HMRC in time
    (b) HMRC failed to make timely and appropriate use of the information for 12 months or more
    (c) the taxpayer could show that it was reasonable for him/her to believe that their tax liabilities were fully in order
    among other things.

    How many of the taxpayers were employees who got their notices of coding and (in spite of being asked to on the notices) didn't bother checking them. Or if they checked them hoped that they wouldn't get caught.

    I can just see HMRC servants (civil ones before this latest debacle) even more snowed under from piles of unworked appeals based on all sort of biased "not my fault Gov" scenarios.

    How much is all that going to cost and I am confident that it will more than wipe out any perceived Treasury "windfall".

    Never mind at least the TAN specialists will be able to put them right. Maybe Mark could provide a template for all the possible "sustainable ESC A19" appeals facts. Never mind the facts just gum up the engine and HMRC will eventually issue revised guidance to make it even more difficult to get away with your tax dues

  2. I was amazed when 'expert' Martin Lewis went on BBC Breakfast telling everyone to invoke the A19 concession. Surely one needs only a grasp of the English language rather than the vagaries of the UK tax system to realise that a concession, is, well, concessionary. And that's before we even start think about Wilkinson...

  3. Thanks Bill and Sam.

    One further thought. For all those commentators who suggest that the underpaid tax should be written off (whether by concession or otherwise). What about all the overpaid tax? Should HMRC just ignore that too? 3 times as many people will get a refund as will have more tax to pay. And without the new computer system they could have been waiting for their refunds for much longer.