Tax code error in your favour: Collect £££

Updated on 07 September 2010 | 11 Comments

What you can do if Revenue and Customs tells you you've underpaid, and what you can do to avoid this occurring in future.

Her Majesty's Revenue and Customs (formerly the Inland Revenue, and Customs and Excise) has found six million errors for the tax year ending 5 April 2008 or earlier. It's started sending letters letting you know how much they owe you, or how much extra you owe them.

Most people should get tax back. This probably reflects the failing economy; since many were working less or earning less at the end of the 2007/8 tax year, you'll probably have overpaid tax at the beginning of it. In some reports, HMRC is putting much of the blame on employers for using incorrect PAYE codes.

If your pay and benefits went up during the 2007/8 tax year, you may find that you're being asked to pay more.

What'll happen to those who underpaid?

If you underpaid, HMRC will write to you saying it wants to adjust your PAYE tax code from April 2011; you'll then pay more tax for 12 months as it collects the underpayment. If you owe £2,000 or more, it'll ask for lump-sum repayments instead.

HMRC shouldn't ask you to make payments if it's just discovered you owe tax from more than six years ago.

What if you can't afford it?

It may be you'd need a loan to repay the tax, or that the extra tax will put you in a dangerous position, perhaps by leaving you with too little spare income for emergencies or making it difficult to pay the bills.

In these circumstances, complain to HMRC. In the first instance, you could write and ask them to waive the bill. When writing letters to HMRC, explain your position and your thoughts and feelings politely to get the best response.

Can you refuse to pay up?

Asking for the bill to be cancelled is most likely to work if a) you have some financial hardship and b) you can show evidence that HMRC had all the information it needed to get your tax bill right in early April 2008 or earlier. This is because, under law, HMRC must issue demands for unpaid tax within 12 months of the end of the tax  year in which it had been provided with all information necessary to get the tax code right. Ask for an Extra Statutory Concession, known as an ESC A19, when arguing this and have your relevant tax self-assessment to hand. Your employer or Citizens Advice might also be able to help.

If HMRC don't agree, you could try to negotiate better payment terms. You could ask for the tax to be paid over two years instead of one, for example.

What if you disagree with HMRC's decision?

When you complain or ask for more time to pay, HMRC will write to you with its decision. If it doesn't waive your bill when you feel it ought to, or if it doesn't give you better payment terms when you believe you need it, it may offer you a review. If you accept (which you must do inside 30 days) HMRC will pass the case to an officer who hasn't yet been involved in it, who will look at the matter again. Revenue and Customs claims a review usually takes 45 days or less. It should write to you telling you of the outcome of the review.

You can also ask for a review before being offered one.

Instead of a review, or after a review, you can appeal to an independent tribunal, if you do so quickly. However, if you have asked for a review yourself, you can't appeal to a tribunal. What's more, after you've appealed to a tribunal, you can no longer ask HMRC for a review. Read more on appealing to a tribunal.

What'll happen to those who overpaid?

If you're due a refund you can get a one-off payment or you can get it back through an adjustment to your PAYE tax code or your next self assessment bill.

What if they're wrong again?

If you receive a letter of correction, you might want to check the facts and figures, and do your own calculations based on the income and benefits you've received, if you can. Perhaps your employer will be good enough to help, and Google reveals plenty of income tax calculators.

To avoid future problems

It may be that HMRC's new computer system will detect as many errors next year, but we could try to head that off early.

Begin notifying HMRC of any changes to your circumstances. Contact your local tax office if you move jobs, get a pay-rise, a company car, new medical insurance or other benefits, or if you get a second job, or go on long periods of sick, maternity or paternity leave. The same goes if you start getting more investment or rental income. Also, HMRC doesn't automatically know if you've started getting a state pension, so let them know when that happens.

Find out how to cut your tax bill without the effort of complex tax planning.

After notifying HMRC of changes, it'll make an immediate adjustment to your tax code to get you paying the right amount of tax for the future. However, it won't adjust your tax code to collect any tax you've already underpaid. You can expect your tax code from the next April, or the one after that, to be amended to collect that underpaid tax.

It may help you to learn more about tax codes to ensure you're on the right one. There's some guidance on the Government website, Directgov.

HMRC doesn't yet correctly account for the new top rate of 50% tax in our PAYE codes, so you'll need to bear that in mind for next year on your self assessment.

Keep all your P45s and P60s. Your P60s you'll probably want to keep forever and your P45s for at least six years (as with all other tax letters and documents). These forms should say all the PAYE income you've earned and the income and National Insurance taxes you've paid.

Don't ignore an HMRC underpayment letter. Check your budget and the repayment terms suggested by HMRC and ensure you can afford it without difficulty. If you can't, write and ask to be exempted or to negotiate the payment terms.

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