As millions of PAYE taxpayers begin today to receive official notices of under and overpayments of tax, it is becoming clear that many of the calculations will be based on incorrect data.
HM Revenue and Customs has begun sending out notices to 1.45 million Pay As You Earn taxpayers, which inform them of a change in coding. The change will require them to pay an extra £26.53 a week on average. HMRC says the average underpayment is £1,380 for the past two tax years.
But one of the unspoken aspects of the notices is that the new calculations form part of HMRC’s efforts to correct its data after years of accumulating mistakes.
HMRC expects that tens, and possibly hundreds of thousands, of people will complain about their tax codes; and the new information from taxpayers who call - and write - will help HMRC correct some of the errors in its PAYE database.
Indeed, correcting errors on the new NPS [National Insurance and PAYE Service] database remains one of the highest priorities for HMRC.
The NPS system was built largely by Accenture as a subcontractor to Capgemini under the “Aspire” contract. Modelled on the National Recording System 2, which was built and run by Accenture, NPS replaces the Computerised Operation of PAYE system which was designed originally to run on ICL (now Fujitsu) VME-based mainframes. The main benefit of NPS is that it provides a single view of a PAYE taxpayer’s affairs.
Before NPS, tax information of employees was spread across up to 12 separate databases that didn’t talk to each other.
Though HMRC made diligent attempts to correct electronic tax records before going live with the “NPS” database last year, many mistakes remain in the system.
PAYE database errors are seven times higher than in the 1990s
Errors in tax records date back several years. In fact the number of “open cases” - which are unresolved tax records that cannot be automatically reconciled at the tax year-end - stand at about18 million.
This compares with only 2.5 million open cases in 1998. The number of open cases is so high today because HMRC has not stopped the build-up of backlogs of mismatches of data on PAYE systems.
Clearing every open case has, in the past, needed manual intervention; and although HMRC has taken on hundreds of extra staff to do what is called “open case clearance”, the backlogs have increased. Every open case is a sign that a taxpayer might have paid too much, or too little, tax.
Many of the millions of notices sent out will be wrong
Matt Boyle a former Inland Revenue IT employee, who is now a PAYE specialist with Research-4-PAYE, says that many of the notices of overpayment of tax that HMRC starts sending out today are wrong.
Do you have one job registered as two?
He says that one of the most common mistakes on the database is the assignment of two jobs to somebody who has one.
This often happens, says Boyle, when a company changes an employee’s pay reference number. Companies use the pay ID number as a quick way of calling up an employee’s record on the payroll system, without keying in the national insurance number. HMRC requires companies to notify it of changes to payroll reference numbers.
Companies may change pay reference numbers when, say, staff at a supermarket transfer to a different location, or they transfer to a company their employer has acquired which runs different payroll systems.
Boyle says that HMRC’s systems often create a new employment record when they are notified of a change in the pay reference number. This means that HMRC’s records show that someone with one job has two - which could increase their tax bill.
HMRC’s systems can set up a new employment record even when it has not received a P45 or a notification of new employment, says Boyle.
“The system can assume that a payroll identity change represents a new employment. That’s just stupid,” he says.
It is one of the root causes of PAYE coding notices being incorrect, he adds.
A further problem is that HMRC will not necessarily cancel an employee’s tax record when that person leaves one job for another.
Unless the NPS rule-based system has been completely satisfied that the person has left one job for another it will keep both jobs as active employment records.
A spokesman for HMRC denied that its “IT kit is fazed by employees moving around within an employer”.
The spokesman added: “The IT kit is working normally and is blameless in all this. The issue of demands and repayments is prompted by a number of different factors, one of which undoubtedly will be mistakes by us. There is no getting away from that but not all demands will be down to us.
“The PAYE system costs less than a penny for every pound we collect, overpayments and underpayments are a natural feature of the system and always have been.”
HMRC added in a statement:
"After the end of each tax year HMRC has to check that the amounts of tax/NICS deducted by the employer matches the information held on HMRC’s records. This is the end of year reconciliation process which has always been an integral part of PAYE.
"Under the previous PAYE IT system all cases that did not reconcile as balanced needed to be worked clerically one by one.
"The new NPS IT system, introduced in June 2009, allows HMRC to automate that process for most customers, ensuring that more people are paying the right tax and getting things right for the future to prevent under or over payments arising in later years.
"It does this by creating a single taxpayer record which draws together all the relevant data around the individual customer on one database (previously spread across up to 12 databases)."