PAYE Tax Codes continue to be a problem. The upper limit for collecting tax debts via a taxpayer’s PAYE code has been increased from £2,000 to £3,000, by regulations that took effect from 20 July 2011. However, it appears that these regulations do not work in quite the fashion that HMRC thought they would, which is a worrying development.

The PAYE underpayments shown on forms P800 for 2010/11 will automatically be coded out in a taxpayer’s 2012/13 PAYE code, where the debt is less than £3,000. However, the new upper limit of £3,000 does not apply to balancing payments arising from a self-assessment for 2010/11. This is because the tax debt regulations were drafted too late to amend the programming for the 2010/11 self-assessment tax returns, brilliant isn’t it?

Tax underpayments arising from self-assessment returns for 2010/11 will only be automatically included in a PAYE code for 2012/13, where the amount owing is less than £2,000, and the return is submitted by 30 December 2011. However, HMRC is trying to be flexible on this point and will allow balancing payments of between £2,000 and £3,000 to be coded out if you request this treatment. To arrange this facility you need to contact HMRC before 30 December 2011

Note that if you have already made arrangements to pay the tax due by instalments under a payment plan, those arrangements cannot be overridden by a coding-out request – TAX DOES HAVE TO BE TAXING

PAYE tax code underpayments as the result of tax code issues are now becoming common place and once again this year is no different many people will be receiving end of year PAYE tax demands from HMRC for underpaid taxes emanating from HMRC’s reconciliation of its PAYE “backlog.”

But there could be light on the horizon in the shape of Extra Statutory Concession (ESC) A19. This states that HMRC should not persue an underpayment if it has not followed its procedures correctly.

In English this means that HMRC should not claim tax back if it has failed to properly use information supplied by a taxpayer, their employer or the Department for Work and Pensions.

The Telegraph quotes Jeff Taylor, editor of The Economic Voice:

“This concession applies to income tax and capital gains tax and allows someone to ask to have the tax debt remain uncollected as long as two important circumstances exist.

The first is that HMRC must have been in receipt of all the relevant information and have used it within 12 months from the end of the tax year concerned.

The second is that HMRC must be satisfied that the taxpayer had a ‘reasonable’ belief that their tax affairs were in order.”

However, a word of warning, HMRC being there usual helpful self have removed any detail of this Concession from their website and replaced it with the following, “This text has been withheld because of exemptions in the Freedom of Information Act 2000″, beggars belief!

As part of its drive to cut costs HMRC will stop issuing copy letters to tax agents of P2 PAYE coding notices, P800 tax calculations and a collection of Self Assessment notices.

“We hope that agents will understand our decision to withdraw these communications. We estimate… that we will save in the region of £1.25m by discontinuing the issue of agents’ copies of Forms P2 and P800 alone”

While withdrawing agent copies of some notices, HMRC will include a new statement on the letters advising taxpayers that the form should be shown to their agent or adviser. The notices affected include:

• P2  PAYE Coding Notices to be dropped from December 2010
• P800 Tax Calculation (August/September 2010)
• P810 targeted review form (already dropped in April)
• SA 250 advising tax payer of UTR and need to file a return and SA 251 Letter advising that tax returns will no longer need to be completed (both October 2010).
• SA 252 Letter for those who don’t submit a tax return but are liable to higher rate (September 2010, but already dropped since April).

The CIOT published the message on its website and immediately raised a series of concerns. While appreciating and supporting the need to cut government spending, the CIOT warned that the move was a false economy.

“This is a seriously short-sighted move from the Revenue,” said CIOT Deputy President Anthony Thomas. By keeping tax agents less well-informed about their clients’ tax obligations HMRC are likely to find they lose more money than they save.”

Calling on HMRC to reverse its stance, he added, “It is particularly disappointing that this change is being sprung on taxpayers and their agents with more or less immediate effect and without consultation.

“If they are set on proceeding, then much more effort will need to be put into telling all taxpayers about the changes. At the moment all that is planned is a message on letters from HMRC to taxpayers, but if the taxpayer doesn’t read letters obviously from HMRC (which is not uncommon, on the basis that they leave that to their agent) they will not see the message on the letter telling them to show it to their agent.

“Given that the vast majority of the costs involved in sending this information to agents come from paper, printing and postage, a consultation could also look at whether sending the information by email offers a possible cheaper alternative to sending it by post.”

The HMRC notice acknowledged “hard decisions and choices will inevitably have to be made” and indicated that it would continue to review the need for existing forms and look for ways to rationalise its printing and postage costs. The PAYE system, for example, will introduce a new process from December 2010 in which P2s will not go out until all 2010 SA Returns (for those meeting the 31/1/2011 online filing deadline) are captured. “This means that the code we issue will be based on the information in the return and will avoid the need for amendments had we issued the code earlier.”