HM Revenue and Customs' 2009 - 10 Accounts - Public Accounts Committee Contents


1  Implementation of the National Insurance and PAYE Service

1. The Department's implementation of the National Insurance and PAYE Service (NPS) is the final and most significant step in its programme to modernise the collection of income tax through PAYE. The NPS should allow the Department to combine the information it holds on individuals' employment and pension income into a single record allowing it to make a more accurate assessment of tax codes and reduce the likelihood of over and underpayments of tax.[2] The consolidation of this information from its former system of 12 regional databases, structured around employers, to a single national database structured around the individual, should also mean that the Department can deal with taxpayer enquiries at the first point of contact, and manage and prioritise its PAYE workload nationally, rather than by region.[3]

2. The implementation of the NPS was deferred twice and even then did not go smoothly.[4] Problems with the software and issues with data quality delayed the processing of 2008-09 PAYE returns by a year and resulted in large numbers of incorrect tax codes being issued.[5]

3. The Department had planned to use the NPS to process the 2008-09 PAYE returns in the summer of 2009, but software problems meant it could not enter the returns into the new system until mid-December 2009. An initial reconciliation of this data identified seven million potential overpayments and underpayments of tax.[6] The Department then decided to work these cases in April 2010 when the automated clearance facility in the NPS went live, but had to postpone this to deal with the data issues that emerged after its Annual Coding exercise.[7] It finally began processing the 2008-09 returns together with the 2009-10 returns in September 2010.

4. Despite knowing in December 2009 that it would be processing people's PAYE for 2008-09 much later than usual, the Department did not tell taxpayers of the delay until September 2010.[8] Taxpayers were therefore unaware that their tax for 2008-09 was not settled and that they might owe more tax or be due a repayment. The Department justifies the decision not to publicly announce the delay on the grounds that it would not be helpful because it could not tell people whether they personally would be affected.[9]

5. Problems with data severely disrupted the Annual Coding exercise. In January 2010, the Department used the NPS to generate the tax codes for 2010-11. The Department expected to issue about 13 million coding notices, 10% more than usual, but found it would be issuing up to 25.8 million notices.[10] Although the Department knew that it had produced more coding notices than it had predicted, it did not realise that some of these were incorrect or duplicates until customers started to query their codes.[11] The Department launched a recovery programme to correct the data and to issue amended coding notices where necessary.[12]

6. The Department has undertaken a review of the implementation of the NPS to try to understand what went wrong.[13] It has yet to conclude that review, but attributes most of the problems to the quality of the data and the complexity of delivering a system with significantly higher levels of automation.[14] It also acknowledges that there was insufficient involvement of end users in the design and testing of the system at each stage of its development.[15] The Department told us that it had already applied the lessons learned from the annual coding exercise in its approach to end of year reconciliations.[16]

7. Following the problems with the Annual Coding exercise, the Department recognised that data inaccuracies would also affect the 2008-09 and 2009-10 end of year PAYE reconciliations. It delayed the processing of 2008-09 and 2009-10 reconciliations to give it time to amend data or isolate the cases affected by data problems. Out of the 45 million PAYE records to be reconciled for 2008-09 and 2009-10, it has identified 10 million cases which cannot be automatically reconciled and which require more work because of data inaccuracies.[17]

8. The Department has now begun to process the 2008-09 and 2009-10 PAYE cases, at the rate of 900,000 per day.[18] It will have processed the majority of the 45 million cases by Christmas and all of them by 31 January 2011.[19] Its latest estimate is that about 15% of the 38 million taxpayers involved will have an adjustment to their PAYE, with 4.3 million people found to have overpaid tax and 1.4 million to have underpaid.[20]

9. The Department will repay all overpaid tax but will not be able to recover all underpayments of tax. The Department estimates that it will find £2 billion of overpaid tax and £1.8 billion of underpaid tax as a result of the 2008-09 and 2009-10 reconciliations.[21] The £1.8 billion underpaid tax already excludes an estimated £160 million from 900,000 taxpayers as a result of the decision to raise the threshold for not reclaiming underpaid tax from £50 to £300.[22] The decision to raise the threshold was not based on a straight comparison of the costs of dealing with the cases and the revenue that could be collected, but rather on the Department's need to keep its workload to a manageable level at a time when it had to process two tax years at once.[23] It calculated that it could reduce the volume of cases by 40% and revenue by only 8%.[24] In addition, some taxpayers will apply to have their underpayment not collected under Extra Statutory Concession A19,[25] and a small number will be untraceable or unable to pay. The Department believes the effect of this will be small and hopes to collect more than £1.5 billion of the £1.8 billion underpaid.[26]

10. The Department has a programme in place to stabilise the NPS, and the system should be operating as intended by 2012.[27] To achieve this the Department will have cleaned the records it holds in NPS and successfully processed these through the key events in the PAYE business cycle, including Annual Coding and end of year reconciliation.[28] The Department plans to work with employers to ensure that the data it receives is accurate, which will in turn allow the Department to increase its accuracy rate.[29]

11. The Department does not know the full costs of the implementation of the NPS. At the time of the June 2009 implementation, the Department estimated the full cost of the system would be £389 million. This estimate includes the additional costs of £33 million, incurred as a result of deferring the implementation by a year, and £78 million for changes in the system requirements and implementation costs.[30] The delay in processing the 2008-09 cases and the problems with Annual Coding have resulted in additional costs and loss of revenue. The Department has estimated some elements of this, including the £160 million from the raised threshold, and informed us that the stabilisation will cost £7 million, but it needs to include the additional costs from the recovery exercises for Annual Coding and the end of year reconciliations, including the impact of diverting staff from other work to assist with this.[31]

12. The Department's temporary Chief Information Officer, Deepak Singh, was paid £160,000 per year under a three year contract which ended in June 2009 after he was unsuccessful in the open competition for the permanent position. He was then paid £150,000, equivalent to £600,000 per annum, to stay on for a further three months whilst his successor worked his notice period. The Department also incurred costs of £19,200 on outplacement services, helping Mr Singh to find another job. The Department justifies the decision to retain Mr Singh's services on the basis that they would otherwise either have had no Chief Information Officer or had to recruit an interim who had no knowledge of the complex IT programme they were trying to deliver.[32]


2   C&AG's Report, paragraphs 2.3 and 2.6 Back

3   C&AG's Report, paragraph 2.6 Back

4   Q3; C&AG's Report, para 2.9 Back

5   Q 60; C&AG's Report, para 2.27 Back

6   Q 49; C&AG's Report, paras 2.20 and 2.21 Back

7   Qq 57, 74; C&AG's Report, para 2.21and para 2.32 Back

8   Qq 54 - 58 Back

9   Q 58 Back

10   Q60; C&AG's Report, para 2.27 Back

11   Q 48; C&AG's Report, para 2.28 Back

12   C&AG's Report, para 2.29 - 2.31 Back

13   Qq 61 Back

14   Q 217 Back

15   Qq 42, 43 Back

16   Q 61 Back

17   Qq 10-12; Ev 31 Back

18   Q 23 Back

19   Qq 18, 19; Ev 37 Back

20   Qq 8, 9, 14-17 Back

21   Q 28; Ev 37 Back

22   Q 32-33 Back

23   Qq 17, 35, 37 Back

24   Q 37, 95 Back

25   Arrears of income tax may be given up where the Department fails to make proper and timely use of the information supplied to it. Back

26   Qq 28-31 Back

27   Qq 6, 87 Back

28   Q 218, 219 Back

29   Qq 220-221 Back

30   C&AG's Report, para 2.10 Back

31   Qq 33, 36, 38-41 Back

32   Q 84 Back


 
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