Hundreds of thousands of taxpayers could escape paying underpaid tax HM Revenue & Customs (HMRC) is demanding back by using a little-known loophole.

The technique has already proved successful for a quarter of the 50,000+ taxpayers who have already attempted to utilise it. Many more who've yet to try could get their debt cancelled (see the Tax Code checker).

The news comes in the last few weeks before over a million people will be asked to repay an average of 1,400 by HMRC after it realised last year it failed to take the correct sums in the first place.

Some 1.4 million owe cash from the past two tax years (2008/09 and 2009/10) while 450,000 owe money from the 2007/08 year. Many will be in both groups of debtors.

Those who owe under 2,000, which forms the vast majority, will have the cash taken from their pay packet in 12 monthly installments during the 2011/12 tax year which begins on 6 April.

What is the loophole?

A clause dug deep in the HMRC rule-book, called the 'Extra Statutory Concession (ESC) A19', states the Revenue must give up any tax if it has not followed its procedures correctly.

Under the rules, HMRC won't collect tax if it has failed to properly use information supplied by a taxpayer, their employer or the Department for Work and Pensions.

Yet this will only apply if the taxpayer is notified of the underpayment over 12 months after the end of the tax year in which the Revenue received the information.

The taxpayer must also have been unaware he or she underpaid.

As we are in the 2010/11 tax year, this means anyone who underpaid during the 2007/08 or 2008/09 years may be able to use the concession, if applicable, as HMRC only informed taxpayers during the second half of 2010.

The window for the 2009/10 tax year will open on 6 April but only if the taxpayer is informed after that date. HMRC guidance does not specify a cut-off after which you cannot claim.

HMRC is not demanding underpaid tax from earlier years as a result of its underpayment error.

How many have successfully used it?

The most up-to-date HMRC figures from last week show of the 50,439 who have tried to use this loophole since last September, 12,336 have been successful.

The revenue points out that some of the claims have been spurious.

Are there any other ways to use A19?

In exceptional circumstances, underpaid tax notified fewer than 12 months after the end of the tax year may be waived if the Revenue failed more than once to make proper use of the information or allowed arrears to build up over two successive tax years.

How do you make an A19 claim?

If you want to complain, call HMRC on 0845 300 0627 but the loophole will only work if it received the correct information.

HMRC stresses it is vital consumers issue the following information:

  • what tax year and underpayment the claim relates to;
  • what information HMRC failed to make proper and timely use of (include evidence such as information sent to HMRC);
  • what date this information was provided;
  • reason(s) why you thought your tax affairs were in order prior to receiving an underpayment notice.

What if you're rejected?

You can ask for another officer to review the decision made.

If you are still unhappy you can use the Adjudicator's Office which investigates complaints about HMRC. See the Adjudicator's website for more information.

You've been asked to pay money back. What if you can't afford it?

HMRC says it will treat those in hardship sympathetically, pointing out if someone cannot pay all the money back over a year they can ask for longer.

Who has been asked to pay money back?

The huge underpayment problem only affects those who pay tax via the Pay As You Earn system where money is deducted by an employer.

Within that group, those with complicated affairs are most likely to have been given the wrong tax code by HMRC, meaning the wrong amount of tax was deducted.

This is most likely to affect anyone with more than one job or pension, anyone who has changed job or those who receive benefits via their employer such as health insurance or a company car.

A tax code determines the amount of your tax-free allowance, which for most workers is currently 6,475.

Those who owe money were given too high a personal allowance meaning too much of their income went untaxed.

Further reading/Key links

Tax help: 2010/11 Tax Breakdown, Taxing Times