Letter from the Chief Executive of the
Inland Revenue to Mr Richard Bacon MP
Sir John Bourn has asked me to write to you
to set out the position in relation to PAYE Open Cases.
In the Inland Revenue's Annual Report and Accounts
for the year ended 31 March 2004 we reported that a well established
housekeeping routine on our computer databases had deleted some
records before the usual final review to check whether any tax
remained overpaid or underpaid for the relevant year. I am sorry
that this has happened and I am writing now to give some more
detail in advance of the PAC Hearing on the Accounts.
The final review referred to takes place after the
end of tax year to check that people have paid the right amount
of tax and NIC under PAYE. Details of pay and tax, provided by
employers as part of their end of year returns, are compared with
our records. Where the correct amount of tax has been paid no
further work is required. However, the amount of tax paid may
be incorrect for a variety of reasons—for example, the PAYE
code may have been changed too late in the tax year for the employer
to operate it, or gaps may have occurred in employment and an
emergency code has had to be operated. Also, some cases may have
failed to match up with a taxpayer record (for example, because
the NINO is incorrect). Both types of case are marked as "open
cases" and listed for clerical review.
New management information systems (set up to monitor
the extra effort we have been putting into reducing arrears of
PAYE open cases) revealed that a function to cleanse the database
of old redundant records was deleting cases that we did not want
deleted. The function clears three year old cases where the customer
has left employment and has not recommenced either at that employment
or somewhere else. We found, though, that it was not distinguishing
between three year old cases which had been given their final
review by Revenue operators and those which had not yet been given
that review. Consequently, the process has deleted some cases
that had not yet been reviewed. The function is at least 10 years
old and was set up at a time when we were clearing around 99%
of our open cases before they became three years old.
Obviously we have to cleanse our databases regularly
or the systems will become overloaded and would eventually break
down. When the process was first brought in it operated effectively
to cleanse our databases. But as the numbers of three-year-old
cases still open grew it became inappropriate. As it was running
behind the scenes it was not visible until revealed by our increased,
and largely successful, focus on dealing with arrears of open
cases.
As soon as the issue emerged the function was
changed to ensure that such cases are not deleted without the
final review being carried out. Cases relating to customers who
left their final employment in 2001-02 or later are therefore
not affected.
For customers who left employment in 2000-01, we
are seeking to reinstate the records from back up tapes so that
the cases can be worked normally.
For customers who left employment in 1999-2000 or
earlier, we are unable to reinstate the records. We have been
trying to determine the numbers involved and the amounts of tax
that might have been overpaid and underpaid. We have also been
considering whether there is any cost effective action we could
take, without a high risk of error, to deal with the cases in
some way. However, as the records have been deleted and cannot
be reinstated we cannot precisely identify the cases concerned,
so our options are limited. We have looked at a mailshot and general
advertising.
We estimate that we would need to mailshot 3.04 million
people using information from our NIRS database in order to reach
an estimated 638,000k whose records were deleted while still open
for 1999-2000 and 1998-99. Information from a similar exercise
we undertook three years ago suggests that we would get a 20%
response but end up repaying only 1.3%. Based on these figures
we could end up repaying as few as 6,000 people. Costs of the
exercise would be over £3 million in terms of direct costs
and staff displacement and in total we would be likely to repay
less than that.
Unless we were to mount a very large advertising
campaign on the lines of the current SA and NTC campaigns the
response to general advertising is also likely to be poor and
create a very large number of extra contacts for us but again
with very little outcome. We estimate the response would be no
better than for a mailshot and could even be lower.
The Department as steward of public money has a duty
to strike a balance in not incurring massive costs in fulfilling
to the letter a statutory function, if doing so will only deliver
minimal benefit securely to a relatively small number of people.
Here the equation is £3 million plus of cost for benefit
of less than that sum to around 6,000 people. Significant numbers
of staff would have to be displaced to deal with largely unproductive
customer contacts. There would also be considerable worries over
whether that benefit is at risk of significant error and fraud
given the long period that has elapsed since the customer left
their final employment, and because we will be unable to undertake
all our usual checks. We have therefore reluctantly come to the
conclusion that we should take no further action in respect of
these two years.
Of course, the position remains that a customer wishing
to claim a repayment can still contact the Revenue in the usual
way with their supporting evidence. We will then examine the documentation
and repay where a repayment is due.
All of the customers whose records were deleted would
have received a form P45(3) from their employer on leaving that
employment. This form invites them to claim a refund if they feel
they have overpaid tax. It sets out clearly what they should do.
So they have had the opportunity to claim repayment of any tax
overpaid. It is just the final manual review that has not been
done.
Years prior to 1998-99 are, on legal advice, time
barred for us to take any action to repay tax overpaid or recover
tax underpaid.
We told NAO about the issue in good time for the
NAO to include it in their Standard Report on the Revenue's accounts
and the Revenue disclosed the issue in their annual accounts.
As soon as we spotted what was happening we corrected it and have
disclosed the issue at the proper time and in the proper way.
There is no question of the matter being concealed.
David Varney
Chief Executive
18 November 2004
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