Tax can be taxing: what to do if you receive a repayment letter

The controversy over tax repayments begins in earnest this weekend as HM Revenue & Customs (HMRC) prepares to send out notices asking 1.4 million individuals to pay extra tax which it now calculates they owe from the last two fiscal years. The issue rose to prominence last month when a pilot mail shot was sent to 45,000 taxpayers, but this month's will be up to 10 times that level.

This is one of those issues that will be resolved for individuals on the details of their cases. In the last month, officials from HMRC and a handful of tax experts representing consumers have been in discussions over test-case scenarios and various other aspects of the problem.

No one yet knows what proportion of people are likely to challenge the notices they receive. Views vary even among tax experts. Anita Monteith of the Institute of Chartered Accountants in England and Wales appears to be taking a more conservative view than others. Talking of the main appeal route, the HMRC's Extra Statutory Concession (ESC) A 19, she says: "It doesn't apply in a lot of circumstances."

However, the charity Tax Help for Older People expects that it will help people appeal in 95 per cent of the cases it receives. Chief executive Paddy Millard says: "In probably the overwhelming majority of cases, it's not going to be their [the charity's clients'] fault." Mr Millard and his team of volunteers are starting to receive the first calls for help. He thinks that, among pensioners as a whole, about 95 per cent would have a strong case on either, all or some of what is being asked of them. He says: "The ones who find us are just the lucky ones. The samples we get are statistically valid [for the pensioner population as a whole]."

If people do appeal in large numbers, they could find themselves met by lengthy delays, unanswered telephones and only a small number of experts who can help them. HMRC does not have any special helplines, for instance. The Adjudicator's Office, which runs a kind of ombudsman complaints-handling service for people who are unsatisfied with the way HMRC has managed a complaint, has struggled in the past to deal with just 1,800 cases a year. It takes about six months to resolve a complaint but it could take even longer if the public starts using its services over tax repayment problems. "We are aware of the issue but I can't say we are gearing up for it," says a spokeswoman.

Because tax is such a specialist area, there are very few consumer advisers who can give direct help. The Citizens Advice Bureau has put up some basic information on its website, but it will be referring cases to the Low Incomes Tax Reform Group (LITRG). This organisation, which has just five full-time employees and is mainly dependent on volunteers, is emerging as the main organisation prepared to challenge HMRC on the fundamentals of the problem and trying to help people with good cases fight the payment demands they receive.

The LITRG has been liaising with HMRC and the Department of Work and Pensions (DWP) over the last month. One of the issues it has been discussing is what should happen to people on low incomes who could have claimed more means-tested benefits at the time if they had known they would have to pay more tax. "For instance, there are cases in which, if someone had known they had to pay £5 a week more in tax, they could have got more Pension Credit, Housing Benefit or Council Tax Benefit," says LITRG chairman John Andrews.

But, while the HMRC is going back two years to claim tax due, these people will not be able to claim their benefits retrospectively into the 2008/09 and 2009/10 fiscal years to which these HMRC notices relate. Mr Andrews was trying to organise an ethical compromise on the issue with the two government departments as The Independent went to press.

Another common problem Mr Andrews, formerly head of tax at accountant Coopers & Lybrand (which merged with Price Waterhouse to become PWC), is trying to resolve in principle before individuals have to work it out for themselves is that of people who cannot afford to pay. Guidance is going up on the LITRG website (see box, right) on this and many other issues.

Tax Help for Older People has already automated its processes to produce standard letters for the main type of cases it is expecting. Top of the list are those for pensioners whose basic state pension was not taxed. "They fail to collect tax and say it's your fault," says Mr Millard who sees this kind of case as one that is an obvious HMRC error and, therefore, as one where HMRC should pick up the tab.

Also clear to him is where someone was wrongly given two sets of personal allowance on two sets of income. There are others where an employer has applied pay-as-you-earn tax (Paye) incorrectly and deducted too little tax. "It's up to the HMRC to challenge the employer," Mr Millard says. He and his colleagues are seeing HMRC increasingly approach the employee for the underpaid tax in these cases when, he says, "the fault lies with the employer and they are liable for the tax".

The websites of LITRG, Tax Help for Older People and another charity, TaxAid, will be the best way for many people to work out what they need to do. But these small organisations, staffed mainly by volunteers, could well struggle to give personal assistance to all who want it. They also work only with people on low incomes (under £17,000 per household annually at Tax Help, for instance) so will be of less service to better-off people. Recipients of HMRC letters who are not on low incomes could also struggle to get advice. These websites could still provide them with useful information on how to make challenges but might not cover their specific circumstances. If they go to their usual tax advisers, however, they could find that the fees charged outweigh the sum in dispute.

As well as the 1.4 million people who are being asked to pay more, there will be 4.3 million who will get repayments of tax they have overpaid. "These need to be checked just as much," says Ms Monteith. Some of the information that HMRC has used in its under- and over-payment calculations is incorrect, says Tax Help for Older People. So it is worth checking basic details to ensure that HMRC has based its sums on the right information about things such as your age and the dates you began receiving a pension or other income.

All the 5.7 million people affected by apparent under- and over-payments should hear from HMRC by the end of the year. But it could take a lot longer than that to sort out all the disputes that follow.

Case studies: Why being honest does not prevent nasty surprises

When speaking to The Independent, Paddy Millard of Tax Help for Older People pulled three letters at random out of a file of tax repayment cases. The charity will be challenging HMRC on each of the three. The cases are outlined below...

Mrs T, Gloucestershire

Mrs T had two part-time jobs and assumed that both employers were deducting the right amount of tax. Instead, she was given a full personal allowance in each case. Therefore, she paid too little tax. Millard highlights the poorly written explanations that many people get from HMRC by reading out the one given to Mrs T which is: "The reason for the underpayment this is the tax underpaid for the year". She is being asked for £1,200. "We'll certainly fight that one," says Millard who attributes the problem to "two tax offices not communicating".

Mr G, Kent

Mr G has been asked for £1,700 but, at the very most, he can only be asked to pay £267. This is because HMRC has its basic information wrong, assuming that he received the basic state pension for the whole year when, in fact, he began claiming only halfway through. Mr G says he informed HMRC of all his sources of income when he retired. Despite this, HMRC still thinks he is employed by a company he left two years ago before he retired.

Mrs E, central London

Mrs E has been telling HMRC of her circumstances every year but "every year they get it wrong". Disabled, receiving Housing Benefit, Mrs E is being asked to pay £440 in relation to three small pensions.

Tax Help for Older People has a client group biased towards honesty. They are the kind of people who volunteer information to HMRC in order to avoid nasty surprises. Brought up to be wary of debt, many in this age group would prefer to pay too much, rather than too little, tax. Mr Millard says: "With our clients, it is clear to us that they couldn't possibly have understood why these underpayments arose." That is why he expects to be helping about 19 out of every 20 who come to him to fight the HMRC notice.

Useful links

Adjudicator's Office

* 020-7667 1832; 0300 057 1111; www.adjudicatorsoffice.gov.uk

Citizens Advice Bureau

* www.adviceguide.org.uk or contact local branches by telephone

HM Revenue & Customs

* www.hmrc.gov.uk * Student tax checker: http://stccalculator.hmrc.gov.uk/UserDetails.aspx

* Reclaiming tax: http://www.hmrc.gov.uk/incometax/overpaid-thro-job.htm

* Delays in collecting tax: http://www.hmrc.gov.uk/esc/esc.htm

* Understanding your P800: http://www.hmrc.gov.uk/p800/index.htm

Low Incomes Tax Reform Group

* www.litrg.org.uk

TaxAid

* www.taxaid.org.uk

Tax Help for Older People

* www.taxvol.org.uk