How to deal with an HMRC letter

LETTERS have started to drop onto the doormats of Britons advising them that they did not pay the correct amount of tax through the pay as you earn (PAYE) system during the tax years 2008-10. Those affected are likely to be those with complex streams of income.

The government argued that the state of the public finances meant it needed to reclaim the full amount owed – estimated at some £2bn – despite HM Revenue & Customs (HMRC) being to blame. The government promised that it will make the process of repayment as painless as possible for the 1.4m people who underpaid tax as a result of a computer error.

Those who have underpaid by less than £2,000 – the average is £1,400 – will make additional payments through the PAYE system from the start of the next tax year. Those who have underpaid by less than £300 will not be pursued, exchequer secretary David Gauke has said. In cases of genuine hardship, HMRC has said it will allow payments to be spread across a period of three years. If it exceeds £2,000, HMRC will be in contact to discuss payment options.

But it has emerged that those who do not pay their bill in full immediately will be hit by interest rates of 3 per cent. While this might seem unfair, accountants say that HMRC is required by law to charge interest on late payments of tax. Interest paid on rebates will be just 0.5 per cent.

So, if you are one of those affected, what should you do? First, you should check and see if you can understand why you underpaid. George Bull, head of tax at Baker Tilly, says: “Those in the 1.4m who are about to receive tax demands will wonder what else they could have done. Most will have reasonably assumed that, because all their income was received after deductions of income tax and NIC via the PAYE system, HMRC already had all the information necessary to get their tax right.”

The Low Incomes Tax Reform Group (LITRG) advises that you should not accept any figure on the calculation without checking that it tallies with your own estimates. It has published a guide on the internet highlighting the main points to note and to watch out for.

Second, if the underpayment has arisen despite HMRC being in full possession of all the information it needed to get your tax right, then you can challenge HMRC under extra-statutory concession A19 for the amount owed for tax years ending more than a year ago. In exceptional circumstances – where HMRC failed to make proper use of the facts it had been given or if it allowed arrears to build up over two successive whole tax years – HMRC said it might also write off the underpayment for 2009-10. A sample letter, provided by LITRG, is printed to the right.

Third, if you believe there is a possibility that the error occurred because your employer or pension-payer was not operating PAYE properly without your knowledge, then you should tell HMRC and ask it to pursue the right party.

Whatever you do, don’t panic and don’t automatically pay in full without checking. Make sure you try to claim where you can and challenge anything you don’t understand. (