Nick Huber, Accountancy Age, Monday 6 September 2010 at 10:51:00

More than ten million people may have paid too much income tax due to errorsin the HM Revenue and Customs (HMRC) tax code system, some reports claim

HMRC admitted last week that 4.3 million people were in line for tax rebatesbecause they overpaid a total of 1.8bn in tax between 2008 and April this year.

A further 1.4 million face demands for repayment because they paid toolittle.

However, HMRC records show that in addition to the 4.3 million cases itadmitted to last week, ?legacy? errors may have resulted in another 5.8 millionpeople overpaying income tax before March 2008, theDailyTelegraph reports.

Experts said the problem of overpaid and underpaid tax was growing as PAYEfailed to reflect the modern workplace and its frequent changes of job, pay andbenefits and accompanying changes in people?s tax codes. The recession is likelyto make the problem worse.

Good news about tax rebates for up to ten million people, followingwidespread bungling of the Pay As You Earn (PAYE) system, could be overshadowedby new bureaucratic burdens for four times as many taxpayers, accountants claim,according to the Daily Telegraph's Ian Cowie.

He quotes Chas Roy-Chowdhury, head of tax at the Association of CertifiedChartered Accountants(ACCA),as saying: ?The remedy may actually be to send everyone a tax return, as happensin Australia and the United States of America. This option may not be verypalatable in the United Kingdom but then, unless HMRC?s new computerarchitecture can sort out this mess, that may be the only choice.

David Prosser, business editor of the Independent, writes that aroundtwo-thirds of people receiving letters from the taxman will be told they havepaid too much tax and that they are now due refunds totalling 1.8bn.

The tax errors will accelerate plans by the Coalition to overhaul the entirePAYE system, theDaily Mail reports.

A senior Tory source said: ?Fairness is a big part of this Coalition and itis not fair that many people have overpaid their income tax while many haveunderpaid.

?This happened because the last government failed comprehensively to reformthe PAYE system. We are now dealing with that mess."

The government is currently consulting on plans to give each employee begiven a single computerised tax account which brings together their employmentand NI records, giving HMRC real time information of all payments made.

Currently, both employers and pension providers make tax and nationalinsurance payments for employees to HMRC and report them to the tax office oncea year. Annually reporting those figures can result in under- and over- paymentsof tax.

Improvements to the tax system cannot come fast enough to some commentatorswho accuse HMRC of arrogance and complacency.

"People on PAYE are meant to be able to relax, knowing that the figure in thebottom right-hand corner is theirs to spend. It is a shock to find that the firmground is actually a swamp and that you owe a mystery sum to the Revenue,"Purves writes in an opinion article fortheTimes, adding: "If the taxman can just climb in through thewindow of your payslip to remove a random extra sum of his own calculation, youstart to feel as if the whole theory of government, outlined above, is shaky."

The taxman credits the 400million system, introduced last year with greateraccuracy, saying its computing power has identified many discrepancies betweentaxpayers? earnings and tax contributions that were missed in previous years.

However, the computer system has been hit by delays and rises in cost, andconcerns about the accuracy of the information it held following aninvestigation by theNational AuditOffice, the Whitehall watchdog, the Telegraph reports.

Further reading:

Sixmillion pay the wrong tax