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HMRC RTI year-end reconciliation fails thousands of taxpayers

October 9, 2014


HMRC yesterday admitted that thousands of people may have received incorrect tax calculations for the year 2013-14 because their annual reconciliation of PAYE accounts has failed to accurately determine employees’ tax positions.  In an email leaked to The Telegraph, HMRC said that the number of people affected by the problem is currently unknown, but may be several thousands as some large employers were affected.  5.5 million P800 calculations were issued during the first annual reconciliation process under the RTI regime, some of which showed an incorrect underpayment or overpayment of tax which did not match that shown on the employee’s P60.  Some employees will have incorrectly been asked to repay tax which they do not in fact owe, while others may have cashed refund cheques from the Revenue which will subsequently need to be paid back.

This year’s reconciliation process saw an increase in the number of P800 forms issued, despite HMRC’s hope that RTI would improve earnings data quality and accuracy of in-year tax collection.  Around 5.5 million P800s were issued to taxpayers over the summer, an increase of 300,000 on the 2012-13 figure, suggesting that far from improving the accuracy of taxation, the move to RTI has caused more errors and inconvenience for employers, their agents and taxpayers.

Duplicated employment records were once more highlighted as a key cause of the incorrect tax data.  The HMRC announcement to stakeholders is reproduced on AccountingWEB, and gives the most common reasons for the incorrect tax calculations as follows:

  • An incorrect overpayment is created as the 2013-14 reconciliation is based upon the Full Payment Submission (FPS) up to month 11 although the employment continued all year.
  • Where the year to date figures supplied are incorrect, for example where an employer reference changed in-year and the previous pay and tax is incorrectly included in the “year to date” (YTD) totals.
  • We have received an “Earlier Year Update” (EYU) and this is yet to be processed to the account.
  • There is a duplicate employment (often caused by differences in works numbers and other changes throughout the year).

HMRC says that they are “urgently investigating” the incorrect P800s and aim to resolve the problems and send a revised notice to affected taxpayers over the next 6-8 weeks.  The department also says that employees who have been received incorrect P800s will not be affected by tax code errors because they will issue corrected notices before Annual Coding takes place. 

Advice to employers and payroll agents from HMRC contained in the update to stakeholders is not to send any 2013-14 Earlier Year Updates unless requested to do so by HMRC as some EYUs have yet to be aligned with PAYE accounts.  HMRC further says that if an employer is approached by an employee who believes that their P800 notice is incorrect, they should advise the employee not to pay back any outstanding tax (usually collected by altering the employee’s tax code for the next year to take more from their wage packet – see our article on coding out of debt – the measure which will take effect from 2015-16) and also not to cash any overpayment cheque they may have received.

These latest difficulties in accurately reconciling PAYE accounts further undermine already shaky user confidence in RTI.  Accountant Elaine Clark, quoted in The Telegraph article, said that this latest problem was “extraordinary, a disaster, and heads need to roll at HMRC.”  Speaking to the BBC, Jason Piper of the ACCA said that HMRC needs to be “transparent and accountable” about PAYE errors, and must learn from previous problems.  The technical manager of tax and business law further commented that a problem of this nature “which hits so close to home for taxpayers […] is bad news for a department trying to extend the reach of its powers into every aspect of our collective financial lives based on the power of its computer systems.”  An anonymous Telegraph source, described as a ‘whistleblower’, stated to the newspaper that “The system is not fit for purpose, it’s inherently flawed and routinely produces errors that cause a huge mess for families and employers”.

HMRC apologised for the error, but in a statement to The Telegraph they once again attempted to put blame for RTI problems firmly on employers (and by association therefore on the agents who handle payroll for those employers), saying “The majority of errors have happened because an employer failed to make a final payment statement for the 2013/14 tax year, meaning our records were incomplete despite reminders that these submissions had to be made.”  This is likely to cause annoyance to those employers and their payroll agents who have worked hard to make the RTI system, with its strict data quality and reporting requirements, function, becoming effectively unpaid HMRC tax collection officers. 

The continuing doubt over the accuracy of HMRC’s RTI data also has serious implications for the further development of the Government’s reform of benefits administration, Universal Credit.  UC is due to be rolled out nationwide from early next year, but without reliable earnings data to base benefits calculations on this will be an extremely difficult (if not impossible) task.

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