Tuesday, November 9, 2010

Many people may have paid the wrong tax - why is that?

This is another post by reference to last night's Panorama - "Tax: Are you one of the six million?"

This rather confused TV programme suggested that as many as 1 in 3 people could have paid the wrong tax. Given the wide definitions used for 'wrong' this will come as no surprise to accountants and tax advisers.

Various contributors to the report suggested what needs to be done:
  1. "There has to be a better way of paying tax"
  2. "Too many staff cuts, too fast"
  3. "Sack those at the top of HMRC"
Without going into great detail let's be clear:
  1. The tax system is complex due, in part, to needless complications introduced by Gordon Brown who ignored advice from tax experts.
  2. Many of those complications result in people paying too little or too much (ie: the 'wrong') tax.
  3. The PAYE system worked fine when people typically only had one job or one pension.
  4. A necessary annual reconciliation of PAYE records hasn't been possible for years. Having recognised this, HMRC commissioned a new computer system that would allow them to consolidate the tax records of all PAYE taxpayers - previously spread across a number of old systems.
  5. The Coalition Government seems to genuinely want to find ways to simplify the tax system. This Chancellor will not be looking for ways to grandstand twice a year as did Mr Brown when he introduced and then defended poorly thought through tax changes. Many of these led to the complexities we have today.
  6. The people at the top of HMRC may not be perfect but until recently their hands were tied by the previous Government and the staff cuts that were imposed on them in recent years. Dave Hartnett, for example, has never struck me as complacent or as being satisfied with the poor standards exhibited by some of his staff. On the contrary.
  7. HMRC's staff cuts are not self imposed. They are a direct result of imposed severe staffing reductions imposed by the last Labour Government. To the extent that future staffing cuts occur the Coalition Government will be to blame.
  8. The PAYE system will only rarely get anyone's tax right through in year tax deductions from salaries or pensions. This will generally only happen where someone has only one source of earned income each year, no benefits in kind and no investment or other income.
What struck me most though was the way that contributors to the programme, including Labour MP John Mann from the Treasury Select Committee, were so quick to blame HMRC for a failing tax system and for the staff cuts. Mr Mann in particular should know better.

I totally accept that HMRC screw up sometimes. But the basic PAYE system is not their fault. Nor are the staff cuts. The new computer system should avoid a recurrence of the PAYE debacle we saw this year - that was caused in part by the move onto the new system.

That the tax system needs to be simplified is in no doubt and I welcome the Government's reviews that are a small step in the right direction. As to how did we get here? I place the blame on Gordon Brown and, by definition, the Labour Party - and have done for many years. Indeed "An increasing degree of frustration with developments in tax legislation" was one of the key factors that led to me giving up tax advice myself after a 25 year career as a tax adviser.


  1. Mark, I don't blame HMRC staff either. I listened to Dave Hartnett bemoaning cuts imposed by Gordon Brown over three years ago. There seemed to be some idea that cutting staff improved efficiency, presumably because it was thought that there was "dead wood". As we know what happened was that many older experienced staff were encouraged to leave leading to a loss of expertise. At the same time, there was a loss of morale amongst staff who felt they had no responsibility and were cogs in a wheel, and a rickety one at that. I have been told by a Revenue staff person to whom I got though in Liverpool how awful the vast open plan office was and how much things had gone downhill since she started as a proper Tax Officer.

    Gordon Brown had a reputation as a bully who didn't listen to any advice which didn't suit him. Panorama as usual missed the target because while HMRC is now severely flawed, this is largely due to outside interference, and with such a leviathan trying to put its house in order there are bound to be "little people" who are damaged along the way.

  2. Is it now time that we perhaps move to an American system where even employees prepare a tax return? This would have helped alleviate the issues.

  3. I seem to be agreeing with you on a worrying number of things nowadays, Mark!

    At the time the PAYE debacle came to light I was quoted in Accountancy Age as saying “While it’s always popular to knock HMRC for getting it wrong, this isn’t what’s happened in this case. The simple fact is that the PAYE scheme was never designed to cope with the complexity of today’s tax system. The systematic errors reported over the weekend aren’t new, it’s just that the introduction of a more sophisticated computer system has brought them to light for the first time.”

    “The question to ask is not ‘why does HMRC keep getting it wrong?’ but ‘how can we simplify a tax system which is collapsing under the weight of its own complexity?’ The first step has been taken with the creation of the Office of Tax Simplification, to whose deliberations the UK200Group is delighted to be contributing. The opportunity it offers to give us back a tax system that works must not be wasted.”

  4. Cheers David.
    It's only twice so don't worry about it! ;-)