HMRC demanding underpaid tax? You may not have to pay

Have HMRC sent you a calculation – a ‘P800’ – showing that you owe tax for the 2010/11 year? Do you need help to understand it? Do you want to know your rights? NMTBP to the rescue

You should always check your taxes. Unfortunately, far too many people are unable to understand their PAYE situation, especially when they have multiple sources of income.

The process

HMRC are now reviewing individuals’ PAYE records for the tax year to 5 April 2011. From the data on their computer, they will work out whether they think you’ve:

- paid the right tax (in which case, you won’t hear from them)
- paid too much (and are due a refund)
- not paid enough (and so, if they think you owe £50 or more, they’ll send you a bill)

Check the calculation

Once you’ve recovered from the initial feelings from opening the envelope and realising that HMRC think you owe tax, the first thing to do is check the calculation

Importantly, much as it might look like one, the tax calculation is not a demand for payment and it is not an assessment which can be appealed – it is HMRC’s estimate of your tax position

HMRC will send notes with the calculation to help you check it. Ask yourself:

1) Where did these figures come from? Compare them to other documents showing details of your various sources of income, such as your P60s, P45s, P11Ds, and bank and building society statements

2) Have several jobs or pensions been added together? More than one source could be shown as a single amount of ‘PAYE income’, so find your calculator!

3) What could be missing? Does the calculation show all the deductions and reliefs to which you are entitled? For example, have you told HMRC about your pension contributions or Gift Aid donations?

4) Can I claim any expenses against my wages? Some common ones are: using your own vehicle for business travel(mileage allowances), if not fully reimbursed by your employer; and special clothing allowances for certain occupations

5) Have I got all my tax allowances? Some allowances are commonly missed, such as Blind Person’s Allowance for yourself, or transferred from your spouse or civil partner if they cannot use it themselves. Note that you do not have to be completely blind to claim Blind Person’s Allowance. Higher personal  age allowances could also be due if you celebrated your 65th or 75th birthday in the tax year. Or if you got married or registered a civil partnership, and either you or your spouse or civil partner was born before 6 April 1935, you will have become entitled to claim Married Couple’s Allowance

6) Am I getting something from the past to which I’m no longer entitled? Your calculation could also be incorrect if HMRC are still giving you an allowance or expense against your income which you can’t claim any more. For example, if you have changed jobs or stopped work and used to claim certain expenses which no longer apply

7) What rate of tax am I paying? Most people on low- to average earnings pay tax at the basic rate of 20%. But if you have a small amount of non-savings income to set against your personal allowances, and some bank or building society interest on top, you may be entitled to pay tax at a reduced rate of 10% on that bank or building society interest

Why did I not pay enough tax?

After checking that the figures on the calculation are correct, you should try your best to understand why you didn’t pay enough tax. This is important in working out whether you can argue that you should not have to pay the bill

Again, ask yourself some questions:

1) Did my employer or pension provider make a mistake?

It’ss possible that the underpayment has arisen due to your employer or pension payer not operating PAYE correctly. They may have dealt incorrectly with forms such as the P45 or P46 you gave them when you started in employment or first received the pension, or with the codes they received from the tax office. If this is the case then HMRC should first seek the tax from the employer or pension payer, not from you

For more information, click here

2) Did HMRC make a mistake or fail to use information to get my tax right?

The underpayment could have arisen because HMRC have failed to make timely use of information about you which they have had in their possession. In such cases, you can consider asking HMRC to write off (that is, not to charge you) the tax under their Extra-Statutory Concession A19 (ESC A19)

Note that A19 usually only applies to underpayments for tax years ending more than 12 months ago - for example, you cannot normally use ESC A19 to ask for tax owing for 2010/11 to be written off if HMRC are advising you of the underpayment in, say, November 2011

However, if HMRC have persistently got something wrong year after year, they do have the power to write the tax off for all years up to and including 2010/11. So if you underpaid tax in earlier tax years, and an underpayment in 2010/11 occurred for the same reasons, A19 might apply dependent upon your individual circumstances

For more information, click here

3) Was I misinformed by HMRC?

HMRC set themselves high standards and if they fail in maintaining those standards they may write off tax (but be aware that this is only likely to be in few cases).

If you’re not entirely happy that HMRC have done everything correctly then you can complain

The Extra-Statutory Concession A19

This is the most likely route you’ll take to avoid paying the tax. In order for it tow work, you have to show three things:

1. You or your employer or pension provider told the Revenue about all your sources of income for that tax year

2. HMRC did not use this information to change your tax code or collect the correct tax ‘in time’. That means by the end of the tax year after the tax year in which you gave this information. So if you are now being asked for tax due in 2009/10 and you gave it all the information it needed in 2009/10 HMRC should have contacted you about it by 5 April 2011. Asking you now is too late

3. You had a reasonable belief that your tax affairs were in order. A belief is not enough – that belief has to be reasonable. Most of us trust the Revenue to collect the right amount of tax and if you were sent a tax code and reasonably believed it was correct that should satisfy this rule. Similarly if you believed reasonably that the Revenue had asked your employer or pension provider to deduct the correct amount of tax then that should be enough

If you pass all three of those tests then you should qualify to have the tax given up under ESC A19

A demand for tax due in 2011/12 fails the second of those tests as it is within the time limits. However, you can still ask for that to be written off as well if it is linked to underpaid tax for earlier years and the same mistake has led to the wrong tax being collected in 2010/11 as well. That is called the ‘exceptional circumstances’ rule – still under ESC A19

To apply you should write back to the tax office that issued the P800. Set out your letter under those three headings and see what happens. Thousands of these applications have succeeded and the more clearly you set it out the better your chances. Template letters are available on the web

If your application is rejected write back and ask for it to be reconsidered by a more senior officer. If that fails then you should write to your MP and ask him or her to pass on a complaint of maladministration to the Parliamentary Ombudsman for not apply its own administrative procedure of ESC A19 correctly

Good luck!

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