our parliamentary correspondent, Accountancy Age, Thursday 9 September 2010 at 11:21:00

The current PAYE system, which caused millions of errors in employee taxpayments, is ?outdated? says Exchequer secretary David Gauke

The government is considering radical reforms to PAYE in an attempt to adjustindividuals' tax payments in almost ?real time? as their circumstances change,minimising the need for end of year adjustments.

The proposals were revealed by Exchequer secretary David Gauke while making aCommons statement on the flood of demands for extra tax payments or notices ofrebates resulting from delayed reconciliations two years ago and the use of anew system unifying individual taxpayer records.

The new system - costing close to £400m - automatically consolidatesindividuals' records instead of relying on manual reconciliation of records indifferent offices dealing with employers' records. It threw up a much largernumber of end of year adjustments, with 4.3m identified overpayments totalling£1.8bn in tax since April 2008, and 1.4m further demands for an average of£1,428 each.

Gauke told MPs he had been "aware" of problems with Pay-As-You-Earn "sinceday one" and had raised proposals for reform. He said "inefficient andclerically intensive" reconciliations required every year to bring estimates ofincome in line with actual income for the year were not carried out last yearrequiring catchup now.

He said PAYE was introduced when most people had only one job ? many for thewhole of their working lives. But now it was common for taxpayers to have incomefrom multiple sources. He attacked the last Labour government for having failedto modernise the system to cope with this.

He said: "The system is outdated, inefficient and burdensome to the Exchequerand taxpayer alike. We need PAYE to reflect the employment issues of the 21stcentury and that will be a focus of reforms that we take forward as part of ourwider strategy for reform."

Gauke said Commons Treasury Committee member and Tory MP Michael Fallon was"absolutely right" that "we need to move to a system that reflects modernworking and allows tax payments in real time rather than on the guesswork inadvance of the tax year or reconciliation a year or two later".

He cautioned against claims that taxpayers will be able to use the A19concession to object to demands for more tax. He warned it was a measure that "in practice doesn't apply that often", adding: "I don't want people to build uptheir hopes that it will be some kind of panacea."

He said the government "are not in a position to wave goodbye to £2 billion"and to do so would not be fair to those who had paid the right amount of tax.