CLIENT ALERT – OCTOBER 2010

ACTIVE ACCOUNTING AND TAX”

PAYE ERRORS

There has been considerable comment in the Press over the past month or so concerning PAYE errors and letters being sent to taxpayers advising that they have underpaid or overpaid Income Tax for either of the tax years 2008/09 or 2009/10. I have delayed slightly writing about this as it was apparent early on that not all of the rather hostile press comment directed at HMRC was correct, we are now a lot clearer about what is really happening and also because if you complete a self-assessment tax return, you should not be included in the population of taxpayers HMRC are reviewing in this exercise.

In my last two client newsletters, I have commented on problems with the issue of PAYE code numbers that arose following HMRC introducing an entirely new computer system to deal with PAYE and it is this same system that is in the news now. As I said, it is unfortunate that the information loaded onto the new computer system was not reviewed as thoroughly as it might have been and the problems with code numbers earlier on this year were a direct result. HMRC has put a lot of effort into resolving the codes issue and now that this problem has largely been cleared up, they have has been able to move on to an exercise they had always intended to undertake following the introduction of this system – reviewing the Income Tax positions of PAYE taxpayers who are not required to submit a self-assessment return.

PAH Planning point: As this review is intended for non self-assessment tax payers, if you complete a self-assessment return and still receive a letter about your tax affairs as a result of the exercise, this is incorrect; please forward this to us soon as it is received, such that we can deal with it on your behalf. Please note, see below for more detail, that copies of the letters being sent to taxpayers WILL NOT also be sent to us as your agent.

As is almost inevitable these days, the Press have the wrong end of the stick regarding this new computer system, which is much better than the old one – hence it is showing up that there have been errors that the old system just didn’t even get close to. Accordingly, whilst the new computer system is not to blame, nevertheless there have been errors over the years and these are now coming to light.

One thing the new system can do, which the previous system did not! – is to bring all of the PAYE affairs of an individual under one tax reference – viz. your National Insurance number. I am sure many people will find it amazing that HMRC were not able to do this before, but it is fact they did not have a computer system capable of doing this work. Previously, the old system, which was introduced over 25 years ago, could only hold individual’s details under an employer or pension payer reference, with no cross referencing available to see if a that person also had income from another employer or pension payer.

PAH Planning point: There are three particular sets of circumstances in which the current exercise is likely to reveal a tax underpayment – I expect you will not worry about a repayment!

• Where a taxpayer has more than one employment or an employment(s) and income from a pension that, individually, are less than the threshold for 40% tax, but when added together take the taxpayer into the 40% band;

• Where a taxpayer has benefits in kind that increase during a tax year.

• Where a taxpayer over 65 years of age has more than one employment or an employment(s) and income from a pension that, individually are less than the threshold at which the additional personal allowances for people over 65 begin to be reduced, but when added together take that taxpayer over the threshold for the allowance reduction.

If you are a non self-assessment return client, please forward any letter you receive about this to us as soon as possible so we can review the position for you. It may well be the case that for us to be able to check the position, we have to ask you for some additional information.

NON-CLIENTS

If you know anybody who receives a letter under this review, but who is not a client of the firm and would like an independent opinion on the matter, please do not hesitate to ask them to get in touch with us. We should be pleased to help at our normal rates.

LETTERS/FORMS NOT BEING SENT TO AGENTS

As noted above, HMRC have announced that the letters and the accompanying tax calculation will NOT be sent to Agents. Accordingly, if you receive any communication from HMRC as a result of this PAYE review, it is essential that you send it on to us as soon as you receive it.

PAH Planning point: In addition to these special letters and tax calculations for 2008/09 and 2009/10, HMRC has also stopped sending copies of various other documents to tax agents. There is quite a long list of these, but by far the most important ones that we will no longer receive are your Notices of Coding. I would stress that these notices are an important part of your tax affairs and must ask that all clients forward all PAYE Notices of Coding that they receive, immediately upon receipt, in order that we can check them and if necessary, arrange for them to be corrected.

Notices of coding are extremely important, even for self-assessment taxpayers, as there is a “tension”, between the Self-assessment and PAYE sections of HMRC, which operate on different computer systems – owing to the different work that they have to do. As a result, sometimes the PAYE section will attempt to tax you through PAYE on matters that should only be dealt with when your Self-assessment return is completed.

PAH WARNING! At best, this can result in you paying tax up to 22 months earlier than you might otherwise have to pay it and at worst pay it when it was not due in the first instance, having then to wait up to, say, 22 months, to receive a refund.

As always, if you have any queries on the matters raised in this Client Alert, or on what is happening at the moment, please do not hesitate to contact us.

LINDA HARRISON

I am very pleased to be able to report that Linda Harrison has recently passed her exams to become a full member of the Chartered Institute of Taxation and is entitled to call herself a Chartered Tax Adviser.

Our business grows mainly by referrals and we are always looking for new clients. I should appreciate it if you could let me know of any colleagues, customers or associates who may be interested in the way we do business. Thank you.

This newsletter is prepared for the general information of clients and contacts of Paul A. Hill & Co. Limited only. No liability can be taken in respect of any action taken or not taken because of relying on the information contained in this newsletter alone. Only the general position can be stated here and there are often qualifying conditions or other criteria that affect the way in which tax relief is given or other proposals will affect you or your business. You should always take individual advice based on the exact circumstances that you have before taking any form of action, or indeed refraining from any action.