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HM Revenue and Customs' 2009-10 Accounts

2 February 2011

The Committee of Public Accounts has published a report on HM Revenue and Custom's 2009-10 Accounts

The Rt Hon Margaret Hodge MP, Chair of the Committee of Public Accounts, today said:

“HM Revenue and Customs has failed in its duty to process PAYE accurately and on time. The Department knew that 7 million people had overpaid or underpaid tax in 2008-09 but took no action and did not start informing individuals until September 2010 because of problems with the new computer system.

“This came on top of the Department’s failure to tackle a backlog of PAYE cases from 2007-08 and earlier, affecting some 15 million taxpayers. £1.4 billion of tax had been underpaid and £3 billion overpaid by taxpayers.

“HMRC’s mismanagement has caused uncertainty and worry to taxpayers and inequity in the system. We now look to the Department to be able to demonstrate clearly by the end of 2011 that NPS can process PAYE promptly, accurately and efficiently. Taxpayer confidence must be restored.

“There is little transparency for the taxpayer over the way that tax disputes with large companies are resolved. While taxpayer confidentiality must be preserved, the NAO will now review the procedures for settling such disputes and we expect the Department to cooperate with this review.”

 Margaret Hodge was speaking as the Committee published its 18th Report of this Session which, on the basis of evidence from HM Revenue & Customs (the Department), examined the processing of PAYE, debt management and tax credits.

In 2009, the Department implemented the new National Insurance and PAYE Service (NPS), the final phase of its project to modernise the collection of income tax through the Pay as You Earn (PAYE) system.  The NPS brings together for the first time all of an individual’s pay and tax details into a single record and offers the opportunity of increasing the accuracy of tax codes and reducing the likelihood of over and underpayments of tax.
The flawed implementation of the NPS in 2009-10 has resulted in lasting and costly losses for the Department and caused unacceptable uncertainty and inconvenience to the taxpayer. Software problems delayed the processing of 2008-09 PAYE returns until September 2010 – a year late - and data quality issues have further disrupted the issue of tax codes for 2010-11. The Department has failed to tackle a backlog of 18 million PAYE cases from 2007-08 and earlier, affecting an estimated 15 million taxpayers.  The exact amounts of tax involved are not known, but estimates suggest £1.4 billion of tax was underpaid and there is £3.0 billion of overpaid tax to be refunded.

The Department failed to understand the impact of the Finance Act 2008 on the deadlines for collecting tax, and so is now unable to collect any of the estimated £650 million underpaid in 2006-07 and earlier. The Department does deploy staff according to emerging problems and priorities; but it is not clear that the Department understands enough about the absolute and relative returns on investment from staff working on different tax streams in order to make decisions which maximise net returns to the Exchequer.  As a result of its mismanagement of PAYE processing, the Department has not collected tax due from some individuals and has taken too much from others, causing both uncertainty and inequity in the system.

The Department has launched a programme to stabilise the NPS by 2012. It is vital that it demonstrates the ability of the system to process PAYE promptly, accurately and efficiently and restores customer confidence. In future, it should process everyone’s PAYE within twelve months of the end of the tax year.  It must also make sure it maximises the net revenue it collects before the deadline expires for 2007-08 underpayments of tax, and that it achieves its aim of processing 2008-09 and 2009-10 PAYE by the end of January 2011.
Based on early successes, the Department has extended its campaign-based approach to the recovery of 90% of tax debt.  It is planning further improvements in its debt management capability, but these will not be delivered until October 2011.
The Department has increased its focus on preventing fraud and error in the tax credits system and is aiming to prevent £1.4 billion of error and fraud in awards for 2010-11.  It is measuring its progress against a series of targets, which it is currently meeting.
The average taxpayer has a right to assurance that the Department has done all it can to maximise returns to the Exchequer when resolving disputes over large companies’ tax liabilities. While we acknowledge the Department’s legal duty to respect taxpayer confidentiality, we expect the Department to seriously consider the scope for greater transparency over its procedures for resolving such disputes, so that public confidence in the fairness of settlements with large companies is assured.