Six million people affected by tax computer errors

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Louise Thomas

Editor

A loophole in the way tax is collected could stymie HM Revenue and Customs' attempts to claw back £2bn of unpaid tax, it emerged yesterday.

Almost 1.5 million workers will face demands to pay back an average of £1,400 in tax after contributions were miscalculated over the past two years. But if anyone affected can prove that they thought their tax affairs were in order they might escape without paying, accountants said.

Nearly six million people in the UK have paid the wrong amount of tax through the pay as you earn system, with around 4.3 million workers in line for a rebate worth £1.8bn in total, an average of £413 each, because they have paid too much. The HMRC will write to those affected informing them of its mistake, with the first 45,000 letters expected to arrive on Tuesday.

Paul Aplin, who chairs the tax technical committee at the Institute of Chartered Accountants in England and Wales, urged everyone to read their letters "very carefully". He added: "Have a look to see how they have calculated the tax. Have they put any benefits in there like a company car or medical benefits that you didn't actually have?" There is a tax calculator on the HMRC's website.

However, taxpayers could still avoid paying any additional money if they can demonstrate they provided all the information necessary to calculate their tax correctly and the Revenue failed to use that information for 12 months. "You could use a concession to get them to write off some or all of the tax," Mr Aplin added.

The errors were made during the past two tax years and emerged because the HMRC is implementing a new computer system to automate the process of updating PAYE records. PAYE was introduced in the 1940s when the vast majority of workers kept their jobs for the length of their lifetimes. The frequency with which workers switch jobs today has overwhelmed the system, an HMRC spokesman said.

Although the HMRC checks that the amounts deducted in tax and national insurance by employers using the PAYE system matches the information held on their records, it finds it hard to keep up when people chop and change where they work.

The mistakes mainly affect anyone who has switched jobs in the past two years. About 85 per cent of workers will have paid the right amount of tax and will not be affected. An HMRC spokesman said that "because circumstances change during the year there will always be a minority who have paid either too much or too little. This year, and going forward, the new IT system will mean more people paying exactly the right tax at the right time than ever before."

But Emma Boon, from the TaxPayers' Alliance, called it "completely unacceptable that a mistake of this magnitude could have happened. Taxpayers will be sick to the stomach to think that they may have to find an extra £100 a month to pay for someone else's mistake. Taxation needs to be simplified so that ordinary people aren't the victims of mistakes like this again."

In July, the National Audit Office warned it could take the HMRC four years to clear an additional backlog involving 15 million people which dates back even further.

The HMRC said it would start recouping the £2bn from next April. It means many people could be at least £100 a month worse off just when household budgets are set to be squeezed with VAT rising to 20 per cent from January and inflation outstripping any wage rises.

Ms Boon added: "It's a real concern for low-income families, who face a nervous wait to see if they are affected and if they face paying back large sums of money. Taxpayers must ensure that they don't get bullied into paying back more than they can afford, and it would be unfair if low-income families are asked to repay a lump sum for someone else's mistake. This error is going to cause a lot of anxiety and could put real pressure on low-income families, who are being squeezed by the rising costs of living."