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HMRC consult on ‘debt’ collection via tax codes

July 24, 2013


HMRC has launched a consultation on increasing the amount of unpaid tax it can collect through individuals’ tax codes. The process, known as ‘coding out’ is already in use. The announcement comes despite widely reported problems with the generation of incorrect tax codes as a result of RTI system failures. HMRC are currently unable to ensure that an individual’s tax code is correct, notifying businesses to ignore their own tax coding notices in some instances.

The proposals raise the possibility that HMRC may automatically change tax codes to collect tax ‘debt’ from individual taxpayers arising from failures of HMRC’s own RTI systems, even where the correct amount of tax has been paid.

The consultation document states that: ‘The Government intends to increase the coding out limit but would welcome views on the detail and implementation of the proposed changes.’  The consultation, which closes in September 2013, outlines a new graduated approach to coding out which will allow HMRC to collect more tax in this way.  This is the second proposed increase in the coding out limit since its introduction in 2011 – the limit was raised to £3,000 from £2,000 in April 2012.

HMRC uses coding out to collect debt (which is defined by the revenue as tax which has deliberately not been paid) and underpayments from taxpayers at source.  Taxpayers have to make it known to HMRC if they do not wish their debt to be collected in this way, and they can make other arrangements to pay HMRC. Tax owed in respect of both outstanding PAYE and Self-Assessment balancing payments can be collected in this way. Where HMRC’s RTI systems show ‘unpaid’ tax due from an individual, coding out allows HMRC automatically to adjust the tax codes of these individuals to collect the amount HMRC believes is due.

Under the new proposals, HMRC will be able to collect more tax from higher earners, while leaving the current limit of £3,000 in place for those on incomes of less than £30,000 a year.  The limit for those earning more than £90,000 a year would be increased to £17,000. 

HMRC has denied that the problem of incorrect tax codes is widespread as has previously reported, but conceded the issue had been encountered in the RTI pilot in their report published on the 22 July, ‘The Real Time Information Pilot’.  HMRC estimated some 10,000 taxpayers have been allocated incorrect tax codes by HMRC’s RTI systems but payroll experts believe the problems to be much more widespread.

The process of coding out relies on the assumption that the data in HMRC systems is correct.  The system was introduced under old-style PAYE but since April 2013 and the mandatory reporting of PAYE in real time the entire basis of HMRC’s administration and accounting for PAYE has changed.

Increasing reports that RTI systems cannot reliably record and account for employer PAYE returns and payments made on behalf of their employees, raises the possibility that HMRC’s assessment of ‘underpaid’ PAYE on individual taxpayer’s accounts may be wrong. In such circumstances HMRC’s attempts to recoup outstanding tax through a changed tax code could risk chaos for taxpayers and HMRC alike.

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