2 The backlog of open Pay As You Earn
cases
13. Despite our previous recommendations,[33]
the Department has made little progress in clearing the backlog
of open PAYE cases from earlier tax years.[34]
The limitations of the Department's previous PAYE system and the
increasing complexity of modern working patterns have made it
increasingly difficult for it to reconcile an individual's tax
without clerical intervention.[35]
These 'open cases' arise where the year end reconciliation of
income and tax paid has identified a discrepancy, indicating a
potential over or underpayment of tax.
14. At 31 March 2010, there was a backlog of 18 million
cases from 2004-05 to 2007-08, affecting an estimated 15 million
taxpayers.[36] The amounts
of underpaid and overpaid tax cannot be known until these cases
are worked, but analysis based on a sample of cases suggests that
around £1.4 billion of tax has been underpaid and £3.0
billion tax overpaid.[37]
15. The Finance Act 2008 reduced the time limit for
collecting tax from 6 years to 4 years.[38]
The Department has forgone a significant amount of tax as a consequence
of this change in the time limit for collection and its failure
to process PAYE promptly. The Department knew that the 2008 Act
removed its chance of collecting any underpayments of tax for
2004-05 and 2005-06, but failed to appreciate its impact on the
collection of underpayments of tax for 2006-07 cases.[39]
It estimates that up to £650 million of tax has been foregone
because it did not process these cases promptly -
£150 million in 2004-05 and 2005-06, and £500 million
in 2006-07.[40]
16. The Department planned to work the 2006-07 cases
in early 2010, but had to divert resources to deal with the problems
in Annual Coding (paragraph 5 above).[41]
It can take the Department more than three months to establish
an enforceable debt once it has contacted the taxpayer with an
income tax calculation.[42]
Thus, to establish a debt for an underpayment of 2006-07 tax in
advance of the April 2011 statutory deadline, the Department would
have had to work the cases and contact the taxpayers concerned
by November 2010. By the time the Department realised the necessary
lead in times to the April 2011 deadline, it was already too late
to act.
17. The Department calculates that, of the £500
million underpaid tax for 2006-07, only £25 million would
be recoverable at October 2010, and concluded that it would not
be cost effective to try to recover this.[43]
It estimates that, of the £500 million underpaid tax for
2006-07, £100 million would have been recoverable had it
processed these cases in April 2010 as originally planned.[44]
However, as well as taking into account taxpayers applying for
Extra Statutory Concession A19, and taxpayers that are not traceable,
the reduction in collectible tax is also based on the assumption
that the raised threshold for recovering underpaid tax would be
applied to 2006-07.[45]
18. The Department intends to work all the overpayments
cases for tax years 2004-05 to 2007-08 and repay the overpaid
tax.[46] It has until
November 2011 to reconcile underpayment cases for 2007-08 and
contact the taxpayers concerned, the last of the backlog years
for which it can still collect tax.[47]
It has 250 people working on the backlog of cases and it plans
to use an automated solution to improve its analysis of the backlog
and accelerate the clearance process, including the prioritisation
of which cases to work.[48]
It aims to clear the backlog of over and underpayment cases by
the end of 2012.[49]
It was unable to give us an estimate of how much of the underpaid
tax it would collect.[50]
It has not yet decided whether the raised threshold for recovering
underpayments will apply to 2007-08.[51]
19. The Department does not think it should redeploy
staff to work on the 2007-08 cases. It has analysed the revenue
collected per member of staff working on compliance or on debt
collection, and assesses this to be lower than the revenue collected
per member of staff working on PAYE.[52]
On this basis, it judges that it does not make sense to move staff
from these areas to work on PAYE cases.[53]
It does not seem to have analysed whether bringing in additional
temporary staff, rather than redeploying existing staff, would
result in a net gain in revenue after taking into account the
cost of the additional staff.[54]
33 Q 87; Public Accounts Committee, Second Report,
of Session 2009-10, HM Revenue and Customs: Improving the Processing
and Collection of Tax: Income Tax, Corporation Tax, Stamp Duty
Land Tax and Tax Credits, HC 97 Back
34
C&AG's Report, para 2.4 Back
35
C&AG's Report, para 2.3 Back
36
Qq 158; C&AG's Report, para 2.4 Back
37
Qq 158, 191 Back
38
Q 158; Ev 37 Back
39
Qq 163-170, 183-185 Back
40
Qq 160, 161 Back
41
Q 185; Ev 37 Back
42
Q 183 Back
43
Q 205; Ev 37 Back
44
Qq 158-160, 171; Ev 37 Back
45
Q 206 Back
46
Qq 177, 178; Ev 37 Back
47
Q 187 Back
48
Qq 193, 202, 213; Ev 35 Back
49
Ev 35 Back
50
Qq 186, 189; Back
51
Q 188 Back
52
Qq 200, 202 Back
53
Qq 172, 202 Back
54
Qq 191, 201, 209-211 Back
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