THE COLLECTION OF PAYE
1. PURPOSE
1.1 Part 2 of the Comptroller and Auditor
General's July 2010 Report on the HM Revenue and Customs Accounts
for 2009-10 reported on the implementation of the National Insurance
and Pay as You Earn Service (NPS) and the consequences for processing
Pay As You Earn (PAYE)[1].
Since then the Department has started the PAYE end of year reconciliation
process for the 2008-09 and 2009-10 tax years. This process has
been widely reported in the media.
1.2 This memorandum is intended to bring
the Committee up to date with the Department's progress with the
2008-09 and 2009-10 Pay As You Earn (PAYE) end of year reconciliation,
its proposals for addressing the backlog of open cases relating
to the 2007-08 and previous tax years, and its plan to stabilise
the NPS.
2. END OF
YEAR RECONCILIATION
2.1 Reconciling individuals' tax after the
end of the year is a normal part of the PAYE process. In previous
years, this has largely been a manual process undertaken by the
Department's staff. NPS now automatically reconciles all but the
most complex cases and determines whether an individual has paid
the correct tax. Where NPS identifies an over or underpayment
it automatically issues a tax calculation (Form P800) to the taxpayer.
The tax calculation is based upon information the Department holds.
The taxpayer is advised to contact the Department if he or she
thinks the information held and therefore the calculation is incorrect.
2.2 Problems with the loading and reconciling
of end of year returns have delayed the processing of over and
underpayments of tax for the 2008-09 tax year. As a consequence,
in January 2010, the Department decided to defer the reconciliation
of these items until the automatic clearance capability was available.
The Department planned to begin processing these reconciliations
from August 2010 once the full NPS end of year reconciliation
functionality had been tested. This meant that it would effectively
be reconciling the 2008-09 and 2009-10 tax years together.
2.3 The full NPS end of year reconciliation
functionality was included in the final software release in April
2010. The Department has taken a number of steps to assure itself
that the end of year functionality was operating as intended before
it entered live service in September. Part of its "controlled
go-live" process involved processing a sample of live records
and checking the results to confirm that the system is operating
as intended. This was followed by running initial batches of live
cases through the end of year reconciliation functionality and
the issue of P800 calculations to taxpayers. It has used these
initial batches to test its planning assumptions on resultant
customer contact levels and the quality of its guidance. The Department
wrote to the Committee on 1 October 2010 to inform it of the outcome
of this test process and its decision to start the full live running
of the end of year reconciliation process.
2.4 The Department plans to complete the
bulk of the 2008-09 and 2009-10 end of year reconciliations for
45 million customer records (38 million individuals) by the end
of 2010. It expects to run daily batches of some 700,000 PAYE
records through the reconciliation process each day, which will
result in an average daily output of some 90,000 P800 notices.
The size of the daily reconciliation batches reflects the capacity
of the Department's systems to issue repayments (it has undertaken
to issue payments within 14 working days of the repayment notice
being issued) and the need to manage the overall level of customer
contact.
2.5 Some PAYE records on NPS are currently
set aside from the end of year reconciliation process. At the
time of our report the Department had identified two million records
where a risk of data inaccuracy could potentially impact on the
end of year reconciliation process. Further scans of the NPS database
have identified a total of 10.6 million cases which may fall into
one or more at risk scenarios and these have been temporarily
set aside from the reconciliation process on a precautionary basis.
The Department has launched a project to check these records using
automated processes and, for the more complex cases, manual intervention.
Increase in underpayment threshold to £300
2.6 Normally, underpayments of £50
and below identified by the end of year reconciliation process
are not pursued. The Commissioners have used their Collection
and Management powers to approve a temporary increase to £300
in the tolerance for underpayments arising during the PAYE end
of year reconciliation work for the years 2008-09 and 2009-10.
2.7 The level of the tolerance is not based
on a straight comparison of the cost of dealing with the individual
cases and the yield at stake, but the need for the Department
to deal with an exceptional peak of work in a limited time. This
option was expected to save the Department having to issue around
900,000 P800 outputs and thus reduce customer contacts by 40%
while reducing tax yield by only 8%—an estimated Exchequer
impact of around £160 million.
2.8 After allowing for the increase in the
threshold, the Department estimated that 4.3 million taxpayers
will receive repayments, while 1.4 million will be sent letters
explaining that they have underpaid. The total underpayments are
worth in the region of £2.0 billion while the overpayments
are worth about £1.8 billion.
2.9 The Department has put in place a new
process for people with 2008-09 and 2009-10 PAYE underpayments
(generally over £2,000) that cannot automatically be paid
through their salary deductions. They will be offered at least
the same length of time to pay as those with smaller underpayments
and not face interest provided they engage with the Department
and agree to pay their underpayment.
Extra Statutory Concession (ESC A19)
2.10 The Department does not expect to recover
all of the estimated £2.0 billion of underpayments. Under
an Extra Statutory Concession (ESC A19), the Department may agree
in certain circumstances not to collect the tax where taxpayers
can show that the Department already had the relevant information
to allow it to collect the tax but it had failed or delayed to
use the information and the taxpayer believed their tax affairs
were in order. The Department has introduced a new web page which
provides customers with information about Extra Statutory Concession
A19 and has simplified the process under which claims are considered.
3. CLEARANCE
OF OPEN
CASES FROM
EARLIER YEARS
3.1 The phased release of NPS also meant
that the functionality to support the automated reconciliation
of individuals' PAYE records was not available to the Department
between July 2009 and April 2010. Although it set up a process
to manually work some open cases, it was not able to work the
bulk of the backlog of 18.2 million un-reconciled cases from 2007-08
and previous tax years affecting around 15 million people. Since
June 2010, the Department has cleared a further 300,000 cases
through manual working.
3.2 The Department wrote to the Committee
on 30 September to outline its proposals for clearing the backlog.
It is now considering the option of using the NPS end of year
functionality to process the residual population of 17.9 million
cases. This would allow it to fully assess the composition of
the open case population including those cases that are untraceable
or otherwise unworkable, those that balance, and the remaining
over and underpayment cases. It hopes to process the majority
of the over and underpayment cases automatically using the NPS
functionality. The new functionality should also provide the Department
with more accurate data to support decisions on the prioritisation
of cases for manual working.
3.3 The Department aims to have a more complete
picture of the composition of the open case population by April
2011, and to complete the reconciliation of the majority of over
and underpayment reconciliations using the NPS automated process.
It plans to clerically work the remaining cases which are too
complex to clear though the automated process. The Department
has committed to completing clearance of all outstanding legacy
cases by the end of 2012.
4 October 2010
1 HM Revenue & Customs 2009-10 Accounts: Report
by the Comptroller and Auditor General HC299, Session 2009-10 Back
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