Thousands of tax code blunder victims to discover fate today

Around 5.7 million people have paid the wrong amount of tax through the Pay As You Earn (PAYE) system because of an HM Revenue & Customs (HMRC) blunder.

Roughly 4.3 million of these have paid too much and are due a refund, but 1.4 million have underpaid and will have to hand over an average of £1,428 each (see the 2010/11 Tax Breakdown guide).

HMRC has sent out the first 45,000 letters to people who are affected, around 30,000 of whom are due a rebate, and 15,000 of whom have underpaid.

The remainder of people affected will be contacted between now and Christmas.

MoneySavingExpert.com highlighted in February the likely chaos due to the HMRC blunder (See the Wrong tax code MSE News story).

Write-off hope

Experts say people hit with an unexpected tax demand may be able to refuse to pay up as HMRC could have exceeded its own time limits in which to ask for the money.

Under tax rules, it must issue demands for underpaid tax within 12 months of the end of the tax year in which it became aware of an underpayment.

And if people provided HMRC with all the information they needed to get their tax code right, it should have used this information within 12 months of the end of the tax year in which it was received to claw back the extra money.

If HMRC failed to do this, taxpayers can ask for an 'Extra Statutory Concession', also known as an ESC A19.

The latest round of errors date back to April 2008, meaning anyone who alerted HMRC to changes in their circumstances that affected their tax code before the start of the new tax year in April 2009 may be able to cite this clause.

Angela Beech, partner at chartered accountants Blick Rothenberg, says: "Those that receive these demands need to think before they automatically pay up.

"If you had given HMRC information that would have enabled them to adjust your tax code to make sure that you did pay the right amount of tax then, if the time limit has passed for them to use that information, they cannot pursue you for the unpaid tax."

She says HMRC was likely to ask for proof that people had informed it about a change to their circumstances.

But she adds: "If you have got evidence or know that you supplied information, then you really should consider appealing against the demand to pay."

An HMRC spokesman says: "HMRC can consider writing off the underpayment in certain circumstances.

"Basically, these are if HMRC had been provided with all the information necessary to get their tax right and the taxpayer could have reasonably expected their tax deductions to be right.

"In these circumstances they need to contact HMRC and ask for the underpayment to be reviewed on that basis."

A total of £2 billion has been underpaid through the PAYE system over the past two years, while £1.8 billion has been overpaid.

People who have underpaid and owe less than £2,000 will be able to have the money deducted from their salary on a monthly basis during the 2010/2011 tax year.

But those who owe more than £2,000 will have to pay it to HMRC in a lump sum.

It is believed that, in some cases, individuals may face both under and overpayments, which could cancel each other out.

Who is affected?

Every year HMRC checks that the amount of tax and National Insurance deducted by the employer matches the information held on its records.

A high number of discrepancies have been thrown up this year due to the use of a new IT system, which holds all the information on an employee in one place, rather than having it spread over several different systems.

Many of the unsuspecting victims will be those with income sources, such as a second job, pension or savings.

Others will be those who have recently switched jobs, and those who get a benefit-in-kind, such as a company car.

Further reading/Key links

Tax help: 2010/11 Tax Breakdown, Taxing Times