Supplementary memorandum submitted by
HM Revenue and Customs
Question 122 (Mr Richard Bacon): Lessons
learned
What happened:
— Each employer on PAYE is required
to submit a return on form P35 annually.
— Before issuing any penalties HMRC
checked for forms P35 that had been received but not processed.
These employers were inhibited from the interim penalty process
and no penalty notices were issued; the estimated number in this
category for 2006-07 was 32,000.
— Following the issue of penalty notices,
there was a high level of customer contact. Our IT Partners, ASPIRE,
found that not all employers had been identified and penalties
inhibited. A further 15,000 forms P35 had been received and, of
these, over 10,000 had been issued with an interim penalty notice
in error.
— A large majority of these cases were
received on 17 May 2007.
Action Taken:
— The majority of the "missing
cases" were immediately reprocessed.
— An apology letter was issued to employers
where penalty notices had been issued in error.
— A process was developed to prevent
any further action being taken to recover the penalties by automatically
discharging them.
Next Steps:
— Analysis of the problem has not yet
established the root cause and investigations continue. However
HMRC has introduced the following to ensure this does not happen
again.
— A scan will be run on a regular basis
to an agreed schedule and in particular prior to the issue of
Penalty Notices to highlight any problems.
— When peak processing commences for
2007-08 (April 2008) the process will be reviewed daily to detect
any record of IT issues.
Lessons Learned:
— HMRC and ASPIRE will carry out a
comprehensive review of all scans carried out between systems
to identify employers that should be inhibited from the penalty
run. This will ensure the correct scans are produced at the correct
time in future.
— We aim to improve problem management
and problem management governance by addressing the issue of how
low priority Reports are consolidated and escalated.
— We will obtain more rigorous and
formal assurance from business partners that all employers for
whom a penalty notice should have been inhibited are identified.
ADDITIONAL QUESTIONS
FROM MR
BACON AND
COMMENTS FROM
LITRG
We provide replies to Mr Bacon's supplementary
questions below and, in addition, have noted Mr Andrew's (LITRG)
annotations to the transcript of the hearing.
Our broad solution to this issue is to let normal
PAYE processes apply with the minimum of delay, bearing in mind
that many of the existing PAYE processes are set to be improved
or automated following significant improvements to the IT support
for PAYE (Modernising PAYE Process for Customers) in 2008.
THE PAYE RESIDUAL
FILE
The "Residual File" is subset of all
end of year returns for employees received by HMRC each year.
It contains details for all ongoing employments at the previous
5 April which could not be automatically matched to a corresponding
taxpayer record on HMRC's database. Forms will fail to match for
a variety of reasons, with the most common being incorrect reference
numbers or where we had no prior knowledge of the taxpayer, normally
because the P45/46 process for employee movements had broken down.
We keep the current residual file on-line as
it is used throughout the year by HMRC staff as they reconcile
customer records. Typically, this will involve matching an end
of year return for an employee in the Residual File with a corresponding
taxpayer record, calculating the overall tax due on the consolidated
income, comparing that with the tax paid under PAYE and taking
corrective action either to collect any underpayment or refund
any overpayment. At the same time, prospective changes are made
to avoid a recurrence in future years, typically by updating employee
data and adjusting the taxpayer's code number for each employment.
At the end of the year, cases remaining on the
Residual File are archived and a new on-line Residual File is
created from the most recent employer returns.
ANSWERS TO
MR BACON'S
SPECIFIC QUESTIONS
1. "How many forms P14 were held by
HMRC in the residual file for the years ending 5 April 2003 to
5 April 2007 inclusive from pension payers where the income was
£1,500 or less?"
HMRC has not analysed the detailed files for
all of these years. We have analysed 2005-06 and this shows that
the residual file held approximately two million P14s from pension
providers where the income was £1,500 or less. The average
amount of pension income on these P14s was just over £500.
2. "Given that pensions providers are
legally bound to provide details of pensions paid to all their
pensioners annually, why is HMRC not in a position to identify
the individuals referred to in the Low Incomes Tax Reform Group
brief prepared for the PAC on 10 October without imposing an unnecessary
burden on pensions providers?"
We fully understand LITRG's concern that HMRC
should notify pensioners of any new or increased tax liabilities
as soon as possible.
Whilst an approach to all pension providers
during 2007-08 would have allowed us to identify affected cases
early and engage in earlier communications, we nonetheless discounted
it on three main grounds:
— The administrative costs to some
6,000 pension providers and their agents in providing informal,
in-year returns (notwithstanding that they are legally bound to
provide details of pensions paid to all their pensioners annually).
The providers would have to make judgements about a range of circumstances
in which tax may or may not be correctly deducted from small pensions.
— Our inability to enforce provision
of the information in the event that the return was not forthcoming
from the pension provider.
— The likelihood that the timescale
for obtaining, matching and processing the information would extend
beyond April 2008.
3. Why does HMRC delete the contents of residual
file records each year, given that they contain potentially valuable
information?
In order to save on-line storage space and to
keep the file to a manageable size, the residual file is closed
at each year end and a new residual file created from the most
recent employer returns.
A separate archive of every P14 sent to HMRC
is retained for six years so no P14 data is actually deleted.
4. Why did HMRC take the view that it was
acceptable to introduce arrangements and staff instructions which
involved the removal/deletion of an individual's PAYE computer
record when the individual had income which was subject to taxation,
albeit that no tax was due and payable in a given year?
The National Audit Office's Report explains
that the precise rationale for this range of formal and informal
practices which attached to the non-taxation of small pensions
is now unclear. There was a combination of incorrect central guidance,
inappropriate local agreements and failures by local offices to
implement agreed procedures, and it is likely that decisions were
taken because staff did not consider the effect material against
the administrative savings for the Department and pension payers.
The Department has now corrected our guidance to staff and begun
a systematic programme of work to put all pensions on a proper
footing but does not intend to recover tax which was not deducted
earlier than 2007-08.
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