HMRC's new NPS computer system, installed in 2009 to improve the operation of Pay As You Earn (PAYE), was designed to bring the taxpayer’s records together, ensuring allowances and tax rates operate correctly across any and all employment or pension income sources. As people can have more than one employment or pension, dealt with by different tax offices, the PAYE system has not always had the information required to work as accurately as it should. As Will Abbott of Randall & Payne, Gloucester explains, “ The PAYE system was only ever designed to give an estimated tax deduction, which in most cases is fairly accurate, with the under or overpayments being corrected in later periods.”

The NPS can compare the tax deducted under PAYE with other information which HMRC holds about that person’s income to perform automated end-of-year reconciliations, a function the HMRC started to use at the beginning of this month, placing it firmly in the news. The letters recently sent out, however, were not tax demands as reported, but calculations. The Form P800 shows individual taxpayers if they have paid too much or too little PAYE tax for the years 2008/09 and 2009/10 (reconciliation 2008/09 was put on hold until the NPS was up and running), not necessarily errors but the result of HMRC reconciling open PAYE years in a way it has not done for some time.
 
HMRC says that the current exercise will help it ‘gauge customer reaction’ and HMRC hopes to start full live-running of end-of-year reconciliation in mid-September.
 
Will Abbott says, “In recent years HMRC have tried to remove people from the Self Assessment system by making more use of the PAYE system than it was ever intended for. So, for example, estimated amounts of private pension income, or savings income have been included in the codes. HMRC have also been using the coding system to collect estimates of tax due on income such as property rent on a monthly basis, rather than collecting through the self assessment system.
 
Interest rates have changed significantly over the past couple of years, so it is perhaps no surprise that these estimates are wrong. If you then add into the mix the changes in people’s circumstances, the deficiencies of the system are highlighted.
 
However, I think the current furore over the system will strengthen the Coalition’s case for reforming the system and I believe we are heading towards employers submitting monthly PAYE returns online, as with the CIS. This may lead to improved cash flow for the Treasury, as it is currently possible for employers to defer payment of some of the PAYE deductions until after the tax year. Would the Coalition go a step further and amalgamate national insurance and income tax into a single rate, in the name of simplification?
 
It goes without saying that if individuals are concerned about their tax position, they should seek advice from a qualified accountant.”

For more information or help call Will Abbott, Partner, Randall & Payne, Tel: 01452 723377