As has been widely reported in the mainstream press, HMRC are currently writing to taxpayers who have paid the incorrect amount of tax through the PAYE system in 2008-09 and/or 2009/10.  Contrary to the views of some commentators there has been no new 'blunder' or 'error'.
 
The PAYE system only ensures that employees pay exactly the right amount of tax every year if they have no benefits in kind, do not change their jobs during the year and have no other sources of PAYE or other income.
 
For all other employees the PAYE system invariably results in under or overpayments of tax each year. In most cases these are resolved through an adjustment to the notice of coding in a later year.
 
This year HMRC have used a new computer program to perform their annual reconciliation and therefore this reconciliation has occurred faster than usual. The new system has also enabled them to identify how many taxpayers are affected - thought to be approximately 5.7 million. Of this number around 4.3 million are thought to be entitled to a tax refund and 1.4 million are thought to have paid too little tax.
 
HMRC started by sending out about 45,000 letters (P800) containing their reconciliations to affected taxpayers. The remainder of HMRC's letters are expected to be sent out by the end of December 2010. 
 
Most of those people who are thought to have paid too little tax will owe less than £2,000 and, as usual, these underpayments will be collected through PAYE over the course of the next year (April 2011-12). Anyone owing more than £2,000 will be asked to pay this more promptly but can request time to pay.
 
All of HMRC's tax calculations and reconciliations need checking as they may contain mistakes. Additionally, in some cases the underpaid tax need not be paid if your circumstances fall within the terms of Extra Statutory Concession (ESC A19). HMRC have recently republished this on its website. It applies only in specified situations where HMRC have failed or delayed to use relevant information, within 12 months after the end of the tax year in which it was received, so will not be appropriate in most cases.

For further information:

Contact the Francis Clark Tax Team. Telephone: 01803 320100

Francis Clark has offices in Exeter, Plymouth, Salisbury, Taunton, Tavistock, Torquay and Truro. Francis Clark is the winner of the ‘Auditor of the Year - Mid Tier’ in the National Financial Directors’ Excellence Awards 2011, and LexisNexis Best General Tax Practice Award 2009. More information is available by logging on at our Online Information Centre