HMRC will not 'write off' tax underpayments

23 September 2010

Despite rumours to the contrary, HM Revenue & Customs has stated it will not simply "write off" up to £1.5 billion in tax underpayments.

According to BBC reports, HMRC "insiders" said the majority of the recent tax error cases would be ignored because they are over two years old and can be challenged by taxpayers.

However, HMRC has told Moneywise the BBC has got it wrong. Firstly, there is no legal time limit stopping HMRC backdating tax due to it, although it admits in a small number of cases taxpayers will be able to appeal.

In addition, many of these "tax error cases" are actually part of the constant stream of what HMRC calls "open cases".

These occur when the tax calculation HMRC holds for a taxpayer does not tally with what their employer has provided and so it has to work out where the discrepancy comes from.

Typically, HMRC waits until the end of the tax year to see if the underpayment or overpayment will rectify itself (for example if the employer corrects the employee's tax code).

Patrick O'Brien, spokesperson for HMRC, says: "At any time there are millions of 'open cases' in the PAYE (pay as you earn) tax system. In the vast majority of such cases the discrepancy will be resolved and no tax will be due.

"Inevitably therefore some of the recent tax error cases won't need to be paid: if someone has gone abroad, died or become bankrupt, or if our calculations are incorrect."

"But if this is money owed to UK plc, why would we just write it off?"

O'Brien also says HMRC will only send out letters once it knows a taxpayer has definitely under or overpaid.

The problem

A few weeks ago, HMRC announced £6 billion in tax errors in its PAYE system, including an estimated £2 billion in underpayments affecting some 1.8 million taxpayers.

For some lucky taxpayers, HMRC errors will lead to a tax rebate, worth on average £420. O'Brien says vulnerable taxpayers such as low income families will be prioritised when it comes to reimbursements. 

The tax calculation errors occurred over the last two tax years and have been blamed on the out-dated computer system used to work out PAYE tax. 

HMRC acknowledged that a small number of taxpayers will have grounds for appeal if they receive an underpayment letter: "HMRC can consider writing off the underpayment in certain limited circumstances.

"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 such cases taxpayers are advised to contact HMRC and ask for their underpayment to be reviewed under an Extra Statutory Concession. For more click here.

But O'Brien warns: "All our past experience indicates these circumstances will only apply in a very small number of cases."

Click here for template letters to the taxman.

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