Contractor accountants keeping tabs on the government’s plans for a Universal Credit system might be unsurprised to hear that might be delayed.

The government was keen to introduce the new system in 2013, but the Revenue does not think it will have adequate real-time ICT systems ready by then.

HMRC were allocated an extra £100 million in the Comprehensive Spending Review to build a new system that could cope with tracking people’s job changes and form the basis for a universal credit benefits programme. However, last week the Public Accounts committee were informed that delays were possible as HMRC may not have the necessary systems in place.

The Department of Works and Pensions will need to extract information from the Revenue in order to commence the universal credit programme. Welfare reform requirements dictate the speed at which the technology needs to be built and these new requirements are a big job, Dame Lesley Strathie said.

The new system will also sort, identify and crystallise tax amounts owed and then translate them into the correct tax codes quickly. For the tax year 2007/08, HMRC estimates it could be owed up to a billion pounds in back tax and if you go back over the last five years, the Exchequer could have received around £40 billion less than it should have. A large portion of this figure is probably due to tax avoidance, fraudulent activity and organised crime, the Revenue believes.

There have been concerns over the implementation of real-time systems not least because of the of incorrect tax codes that were sent out earlier this year. However, Dame Lesley admitted that this was more down to the quality of the data that was fed into the system rather than the actual software.

HMRC’s financial controller, Jon Fundrey, said that IT work had been held up slightly due to the government moratorium on significant ICT spending. The same was true of IT recruitment but this is now underway.

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While there was no surprise on the part of the Association of Certified Chartered Accountants when HM Revenue and Customs announced yet another taxation blunder, they did add that HMRC had an insufficient number of staff to handle the invevitable influx queries resulting from it.

HMRC recently made an announcement that there were millions in taxes underpaid to them due to a glitch in their PAYE system, resulting in a massive posting of letters demanding repayment. The silver lining is that some taxpayers had actually overpaid due to the glitch and will be receiving a rebate.

The same PAYE system that caused these latest tax miscalculations was also responsible for another glitch earlier in the year: as reported by Independent Contractor Services, HMRC had sent out incorrect tax codes in the thousands, resulting in a large number of taxpayers to receive more than two differing codes, which put them at risk of overpaying through PAYE.

UK contractors are already of the opinion that the British tax system is needlessly confusing and complicated, resulting in the UK earning a reputation for possessing one of the most complex tax systems on a global scale and possibly justifying the creation of the new Office of Tax Simplification by the government said Chas Roy-Chowdhury, taxation head for the accountancy body.

Mr Roy-Chowdhury stated that the issue highlighted the problems caused by the complications of the tax system in the UK. He said that there will be quite a few employers and taxpayers are now distrustful of the country’s tax regime since there have been so many who have encountered problems with the tax codes.

For those have been affected by the PAYE error, the HMRC has instituted a repayment strategy that can be assessed by calling 0845 302 1435; the strategy can be utilised by businesses, including contractor accountants, as well as individual taxpayers.

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It was Benjamin Franklin who declared that the only two certainties in life are death and taxes. It is probably a good thing that he never met the present day HMRC: recent events have shown that while we will be certain to be taxed, not even those on good old bog-standard PAYE can be certain exactly how much tax they are going to be asked to pay.

Of course your average jobbing contractor has been in that position for the last eleven years, thanks to the predations of IR35. No matter how sure you are of your status, and how careful your accounting, you simply cannot be certain that you will not be hit with a new assessment from HMRC that says you got it all wrong and please can we have a few tens of thousands extra. Actually, I rather doubt they even say please. Nor will they say sorry when, after several years of uncertainty and court appearances, they are told they were wrong and your tax has been correctly assessed all along.

Then there came BN66, which put simply was HMRC “clarifying” an arrangement hat had gone unchallenged for several years and declaring that it never actually applied. The sums involved in that one are horrendous, stretching into six figures for some. That case is still rumbling along, and will do for a few more years yet until all the avenues for appeal have been exhausted.

Now we have the latest fiasco, where a new system has gone back over HMRC’s records and found a raft of miscalculations. Sadly, and perhaps typically, HMRC decided that they couldn’t simply ignore the errors and are now sending out demands and tax refunds in roughly equal numbers. Given that the net balance of taxes owed is a mere £200 million, not counting the cost of the whole exercise, you have to wonder why they are bothering.

I say “mere” advisedly. While it is a significant number in itself, it seems that HMRC are not actually collecting a few billions of pounds each year that they already know about, which rather puts that £200 million into perspective. But no, HMRC are a tax collecting organisation and collect taxes they surely will, regardless of how much trouble it causes to the victims. Victims, it must be remembered, who almost all have no idea that they weren’t paying the right taxes in the first place and who can hardly be blamed for getting it wrong.

Then into the middle of all this comes a consultation document from HMRC proposing that taxes are deducted at source and will be calculated on a month-by-month basis, which on the face of it has some merit. However, a bit further down the paper they are talking about taking the whole tax calculation exercise away from the employer and using some centralised system that takes the gross pay from the employer, works out the tax due, gives that to HMRC and sends you the balance.

How terrifying a thought is that? An organisation that is so utterly inept it can’t do the equivalent of tying its own shoelaces setting itself up as the ultimate arbiter of who gets paid. I don’t think so…

I was talking recently about the wisdom – or lack of it – of giving HMRC a General Anti-Avoidance Regulation to play with. It seems my misgivings as to their ability to handle such a tool were actually rather underestimated. And I am absolutely certain of that!

Alan Watts can found at LinkedIn.
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HMRC is urging sole traders and contractors, as well as employees, to get in contact with their local tax office if their tax code looks unusually low or high.

Contractor accountants should also be vigilant, however it is unlikely that they would be able to spot all errors across their client base. Therefore they should advise contractors and sole traders to check their own tax codes where possible.

HMRC recently updated it’s PAYE and NIC system which is believed to have caused the errors.

Most people will have a personal allowance of £6,475 in the tax year covering 2010 and 2011. Those with an incorrect tax code will be paying the wrong amount of tax from the start of the new tax year from April 2010.

If you believe your tax code may be incorrect, have a look at HMRC’s notes included with the coding letter or go to the HMRC website for information. If you still believe there is an error, HMRC have opened an advice line 0845 3000 627 specifically for those with a tax coding issue.

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When people receive a PAYE tax coding notice from HMRC, they naturally assume that the information contained therein is correct. However this year, for a large proportion of people, that is not the case.

The Chartered Institute of Taxation (CIOT) and several leading contractor accountants are calling on the government to better inform the public about the effects of the tax coding errors. If left unresolved, thousands of people will have incorrect deductions from their salary and pensions payments which could run into hundreds of pounds.

The problem stems from a new PAYE system and has led to many people with one job receiving two or in some cases more, tax coding notices. The resulting error has a direct impact on an individual’s personal allowance by effectively splitting it across two or more jobs. This means that their employer, in accepting the tax code as correct, will be required to deduct more tax than is actually due.

For the vast majority of people in the UK, the personal allowance is £6,475 for the 2010-11 tax year. If this tax free figure is incorrectly applied to someone’s pay, it will cut a basic rate taxpayer’s net income by around £108 a month or £1,295 a year.

In addition to calling on HMRC to issue a public statement on the problem, the CIOT wants them to provide additional resources to deal with the expected upsurge in the number of enquiries, and to check the accuracy of all outstanding tax coding (P2) letters still waiting to be sent.

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