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How the PAYE tax code bungle loophole works

How the PAYE tax code bungle loophole works

Millions of taxpayers are fraught as they expect tax demands from the HM Revenue and Customs demanding they repay tax wrongly calculated over previous years.

The taxman claims the computer errors are specific to income tax and relate to wrongly applying PAYE codes for 6 million or so taxpayers – which is about one in seven UK PAYE taxpayers.

An astonishing 1.4 million people who have full or part time jobs or pensioners owe an average £1,400 each. Another 4.5 million taxpayers are owed refunds for tax wrongly deducted from their salaries.

Pundits on TV and in the press have suggested a tax loophole means taxpayers who owe tax can wriggle out of paying.

These claims have a germ of truth – but persuading the taxman to set aside a bill is not easy.

The loophole is a long-standing ‘extra statutory concession’ or ESC.  An ESC is an acknowledgement from HMRC that someone can pay less tax than the law strictly entitles him or her to hand over.

ESC A19 is the specific loophole everyone is talking about, which basically states that if a taxpayer handed the tax man all the information required for working out their tax and HMRC failed or delayed to use the information, then in special circumstances, a tax bill can be wiped out.

Making an ESC A19 claim – points to prove

 

(Hints are given in italics)

 

A taxpayer should write to their tax office stating:

  • Tax arrears build up resulting from HMRC’s failure to make proper and timely use of information supplied by:

Either

  • A taxpayer about his or her own income, gains or personal circumstances
  • An employer, where the information affects a taxpayer’s coding

Or

  • The Department for Work and Pensions, about a taxpayer’s state retirement, disability or widow’s pension

Typically, the taxpayer needs documents to back this up – like a P60, P11d or P45 that is dated and proved as filed. With online filing, electronic receipts should be available.

To have the tax written off, the taxpayer also has to show that he or she:

  • Reasonably believed their tax affairs were in order

And

  • Was notified of the arrears more than 12 months after the end of the tax year in which HMRC received the information indicating that more tax was due

Or

  • Was notified of an over repayment after the end of the tax year following the year in which the repayment was made.

The last two are no problem, since HMRC would have sent out letters – but reasonably believing their tax affairs were in order is a subjective test.

 

If a tax inspector declines a claim on the grounds a taxpayer did not have a reasonable belief, then appeal and examine the inspector’s thought process.

 

Proving someone’s state of mind is difficult and may well involve an opinion the inspector is not qualified to give. The taxpayer does not have to prove his or her affairs were in order, just that they reasonably believed they were so.

In exceptional circumstances arrears of tax notified 12 months or less after the end of the relevant tax year may be given up if HMRC:

  • Failed more than once to make proper use of the facts given about income
  • Allowed the arrears to build up over two complete and consecutive tax years by failing to make proper and timely use of information they had been given.

If an ESCA19 claim is denied, a taxpayer can appeal, but at that stage they need to weigh whether the cost of proceeding outweighs the time, hassle and expense of taking the case forward.