The HMRC Lottery: The 'Brown Envelope' Arrives!

The letter box sounds, the post has arrived with the unsightly ‘brown envelope’ from HMRC proudly sitting on the doormat.  Sheer panic, or optimistic excitement – what’s inside? - a PAYE Coding Notice (the fifth one in so many weeks!), an unexpected tax calculation (P800) for an earlier year (how can I possibly owe any tax!?) or the pleasant surprise of a tax refund?!

So, can we the taxpayer, trust and rely upon the information presented before us by HMRC?  Sadly the answer is no.  My own experience has found that around one in four tax codes are incorrect, particularly for taxpayers with multiple incomes, company benefits and for those who are higher earners.  Such errors can lead to shock tax bills for taxpayers whom generally believe that their affairs are in order.  After all, your income has been subjected to ‘Pay As You Earn (PAYE)’ so surely you have nothing to worry about!?

HMRC will argue that PAYE is not intended to collect the ‘right’ amount of tax during the year; it is merely a system in place in an ‘attempt’ to recover the correct amount of tax, followed by an end of year reconciliation to ‘tidy matters up’ where necessary.

HMRC has already started the reconciliation of PAYE records for the 2011/12 tax year.  HMRC says that for 2011/12 up to 3.5m taxpayers will receive an average tax rebate of £379, whilst up to 1.6m taxpayers will be issued with a tax demand on average of some £537.  Given the issues surrounding the large number of incorrect forms P800 that were sent out last year (for years 2007/08 to 2009/10) - a topic hotly debated in the media - what can we expect of the forms P800 this time round?

An increasing number of new clients, who approach us for our services arrive with issues surrounding their tax codes.  I was approached last year by a new client who had been issued with forms P800 for years 2008/09 and 2009/10, as his tax codes for those years had got it horribly wrong.  In this case, as part of the PAYE reconciliation process HMRC had identified that there were arrears of tax of some £18,000, which as you can imagine came as a bit of a shock to the taxpayer.  Now, whilst the tax demand was correct, following our appeal the client was delighted to learn that HMRC agreed to write the tax off, for a number of reasons.  A lesson to be learnt – do not just accept that HMRC has ‘got it right’!

If you wish to discuss the issues raised in this article or require assistance generally, please feel free to contact me at simon@wardwilliams.co.uk