Annual PAYE reconciliation process causes another media storm

The current news headlines are once again full of horror stories claiming millions of people have underpaid tax through the Pay As You Earn (PAYE) system, while others are due repayments. The real issue relates to how many of these under and over payments have been caused by errors and glitches in HMRC’s new computer system, rather than the tax system operating as intended with HMRC undertaking reconciliations of taxpayer’s positions after the end of the tax year?

The 2010/11 PAYE reconciliation process is currently underway. We understand that all 2010/11 repayments have been dealt with; there were 2.3m of them and the average tax repaid to taxpayers was £297.

HMRC is now concentrating on the underpayments. 1.2m of these have been identified and the average tax underpaid is £512, about half of the underpaid tax identified in the 2009/10 process. For 2010/11, HMRC is using a de minimis of £50, below which it will not reclaim underpaid tax shown up by the reconciliation process. The de minimis for 2009/10 was £300.

HMRC has always endeavoured to reconcile individual taxpayers’ PAYE records, comparing the tax deducted under PAYE with other data which HMRC holds about that person’s income. Some years ago, before everything was computerised, this was done manually and was extremely labour intensive, taking many months. HMRC inevitably struggled to keep up and fell behind as the organisation was downsized.

HMRC finally installed its new NPS (National Insurance and PAYE service) computer system in summer 2009, with the aim of improving the operation of PAYE. The PAYE system has never catered well for people with more than one employment or pension, and this was not helped by having different employments/pensions dealt with by different tax offices which did not always communicate. The NPS brings together all a taxpayer’s records and so makes sure that allowances and tax rates are operated correctly across all employment or pension income sources.

The NPS has the ability to perform automated end-of-year reconciliations and send out calculation forms, P800, to those taxpayers who have under or over payments of tax for that year.

How can you afford a house like that?

Ever wondered how business people can afford large mortgages when their business results are not, on the face of it, able to support the repayments let alone other general living costs.  Well now HM Revenue & Customs are starting to ask the same question.

From 1 September 2011, HMRC have joined with mortgage lenders in a new Mortgage Verification Scheme.  They say that this is all about combating fraud.  HMRC will be able to comment if asked to on the income figures declared on mortgage applications.

People who have self certified their income for mortgages may well find themselves facing HMRC questions such as: "You disclosed your income under Self Assessment as £12,000, but put £52,000 on your mortgage application - why should we not tax you on £52,000?".

Of course, the alternative is for a taxpayer to admit to a fraudulent mortgage application!

Our tip -
"Think carefully about what you disclose to a mortgage provider.  Try to cheat the system and it is likely to come at the price of a tax enquiry."