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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