How to improve HMRC s collection of debt: coding out. Response by the Association of Taxation Technicians

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1 How to improve HMRC s collection of debt: coding out Response by the Association of Taxation Technicians 1 Introduction 1.1 The Association of Taxation Technicians (ATT) is pleased to have the opportunity to comment on this consultation document published on 11 July We previously responded to the consultation published in April 2011 and we believe that some of the comments made in that response are as pertinent now as they were then. 2 Overall summary 2.1 The ATT is in agreement with the statement made by HMRC that there must be a system whereby debt is collected efficiently and economically whilst at the same time safeguarding the position of both the vulnerable and short term debtors. It is very important that HMRC have in place a system to help those who are struggling to pay what is due, whilst at the same time having a rigorous process for the collection of debts due from those unwilling to pay. 2.2 It is extremely important that the debt which HMRC have for collection is a genuine and collectable debt. It is not unknown for HMRC to be pursuing debts which are not agreed and subsequently prove to be inaccurate. It must be clear that the debt is actually due before steps are taken to recover this, either by coding out or by other means. 2.3 We agree with the identification of the main types of debtor set out in paragraph 2.8. We believe, however, there should be another group, namely for those taxpayers who are issued with forms P800, frequently for more than one year at a time and often indicating a substantial underpayment of tax with no explanation as to how or why this has arisen. It is not unknown for such forms to offer an explanation of the underpayment stating You are underpaid because you did not pay enough tax! These taxpayers come within the bewildered group. HMRC must provide for a detailed explanation of how the underpayment has arisen. 2.4 It is unfortunate that some statements within the consultation document demonstrate a limited knowledge of PAYE. In paragraph 3.4 it is stated that Coding out was introduced in To our knowledge, coding out of underpayments has been in existence since At that time it was the normal method of collection with underpayments being spread over a period of up to three years, even longer in exceptional circumstances. We note from paragraph 3.37 that it is Registered in England and Wales Registered Office: 1st Floor, Artillery House, Artillery Row, London SW1P 1RT A company limited by guarantee: Number Registered as a charity: Number VAT Registration: Number

2 now proposed that debts can be recovered over more than one year and we believe this should be implemented as soon as possible. 2.5 The second statement with which we disagree is in paragraph 3.13 where it states, An underpayment of tax can occur if an individual s income increases but HMRC does not know about it right away so does not adjust the code. If the source of income against which the code is being applied increases, the operation of PAYE will collect the correct amount of tax unless the code number is not the main code number and does not reflect the allowances due. A new source of income, paid gross, will create an underpayment, but that is different. 2.6 The second part of the statement in 3.13 raises an interesting, but completely different aspect to the whole topic of tax debt, which does not appear to be addressed at all in this consultation. The statement continues or if the employer or pension provider uses the wrong tax code. It is appropriate to add another alternative at this stage, as it can have the same effect. This is HMRC issues an incorrect code. In either situation the taxpayer can find themselves underpaid at the end of the year through no fault of their own, and with probably very little opportunity of spotting this during the year. Whilst there are possible remedies to these situations under either Regulation 72 of the PAYE Regulations or under the provisions of Extra Statutory Concession A19, underpayments in these situations should not be considered for collection by HMRC by coding out or other means unless and until these situations have been considered in detail and the position agreed with the taxpayer. 2.7 Whilst this consultation examines and considers ways of collecting tax debts, this is a little like closing the stable door after the horse has bolted. There are numerous situations seen in practice where an underpayment is created because HMRC amend code numbers which have been carefully considered and issued on an agreed basis in multiple code cases, where the subsequent amendments by HMRC create significant underpayments by the year end. Since HMRC stopped issuing copy notices of coding to agents, these amendments are made without the agent being aware and the taxpayer/client not appreciating the significance of the amendments. It is vital that HMRC address this situation as preventing the underpayment arising in the first place is much better than trying to recover it subsequently. We are concerned about the statistic quoted in 3.12 that 85% of tax deductions made through PAYE are correct. This implies that 85% of code numbers are correct, a statistic which we find to be unrealistic based on experiences of our members. 2.8 Whilst we have no objection, in principle, to the proposed graduated limits for coding out, one aspect which does not appear to be reflected within the proposals is the fact that the more an individual earns, the more substantial their outgoings are likely to be. For example, an individual earning 90K or more is likely to have a more substantial mortgage and/or other regular outgoings than the individual earning 30K. In the circumstances, it should not be assumed that an individual earning 90K (or more) can automatically afford to have not just three times the amount which HMRC consider can be coded out for an individual earning 30K, but actually over five times as much at 17K. 2.9 There is another misconception in paragraph 3.26 in relation to determining the amount which can be coded out. The definition of earnings is stated to be: earnings from the source associated with the main source of income paid through PAYE (the primary PAYE source). The following example shows the problem: P/ATTTSG/Submissions/2013 2

3 Example Mr A has the following sources of income: Salary from employment 35,000 Pension from former employment 20,000 State Pension 7,000 Total earned income 62,000 If there was an underpayment to be coded out, the limit would be 5,000 on the basis of the proposals, but if Mr B earned the same amount, 62,000, from a single employment, the limit would be 11,000, more than twice as much We believe it is disingenuous to suggest in 3.33 that taxpayers have allowed their tax to fall into arrears. Frequently those who find themselves underpaid under PAYE have no idea how they can have become underpaid when they have had tax deducted from PAYE from all their earnings throughout the year. The possible reasons for this are too numerous to mention, but the coding notices are not sufficiently clear to enable many taxpayers to appreciate that there is an error. Also, the explanation given by HMRC with the end of year reconciliation must also be clearer and much more easily understood than the current notes on forms P Specific questions 3.1 Question 1 Are the graduated coding out limits for debts and tax underpayments recommended for those on incomes of 30,000 or above set at the right level? Whilst the concept of graduated coding out limits appears reasonable in principle, we believe that the availability of funds to meet the significantly increased amounts suggested for coding out may be illusory. There needs to be a system which allows taxpayers to consider, in advance of the tax year, how much they can afford to have collected by way of underpayment coded out. 3.2 Question 2 Does the proposal not to change the coding out limits for those with incomes of less than 30,000 adequately safeguard those on lower incomes? We have not been made aware of any issues with the current limit of 3,000 being too high. However, we are aware of situations where the underpayment/debt was slightly in excess of the limit of 3,000 where a part direct payment and coding out of 3,000 would have been acceptable to the taxpayer, but not HMRC. Flexibility is the key to this approach and has the potential to work for the mutual benefit of both the Exchequer and taxpayers. P/ATTTSG/Submissions/2013 3

4 3.3 Question 3 Should the statutory safeguard to prevent PAYE deductions exceeding 50 per cent of an individual s relevant pay be extended? We agree that the statutory safeguard, currently applying only in relation to K codes, should apply to all codes. Many practitioners believed that it did apply to all codes. Whilst it may be unlikely that a non-k code will produce a deduction which would exceed the 50% limit, it is as well to have the limit in force for all codes, just in case a reduced code is issued without any indication this should be applied on a Week 1/Month 1 Basis. 3.4 Question 4 In circumstances where a debt cannot be collected via the tax code in one year, do you agree that HMRC should use existing powers to code out part of that debt? As noted in our reply to Question 2 above we consider that flexibility in approach is the key to collecting debts as efficiently as possible as far as both HMRC and the taxpayer is concerned. We believe that HMRC should consider both the splitting of a debt into two parts, part to be settled by direct payment and part by coding out, as well as coding out the debt over more than one year. Such arrangements must be with the agreement of the taxpayer and, in particular in selfassessment cases, must factor in the possibility of subsequent tax returns producing other direct payment liabilities. It is essential in this situation that the coding notice clearly states what debt is being collected and to what year, or years, it relates. 3.5 Question 5 Do you have any comments or suggestions on the indicative impacts identified in the table of impacts? The consultation document at 2.9 indicates a total debt in 2012/13 of 15.1billion whereas the impact assessment suggests that these proposals will produce only approximately 45 million recovery in each year. This seems to us to be a very small amount in the overall scheme of things and suggests that the whole matter of debt recovery may need to be examined in greater detail. If the figure of 15.1 billion includes managed debt, ie debt for which a payment plan has been agreed and is working, then the impression given by these figures is misleading. The potential cost of dealing with queries from employees could be quite substantial, hence the need to ensure that the taxpayer is given a very clear statement showing how the underpayment/debt has arisen, to which year or years it relates and how the whole amount is to be collected if this is to be achieved by more than just coding out and also if collection is planned to take place over more than one year. 4 Conclusion 4.1 We believe that HMRC must operate an efficient and flexible system for the collection of tax debts. In operating such a system, however, we believe HMRC must:- address the problems created by the issue of incorrect code numbers after appropriate code numbers have been agreed with agents, P/ATTTSG/Submissions/2013 4

5 improve the communication with taxpayers with much better explanations of how and why an underpayment has arisen, clearly indicate on coding notices to which year, or years, an underpayment relates, be flexible in the manner in which the underpayment/debt is collected. This can include splitting the debt between methods of collection, e.g. direct payment and coding out, as well as collecting the debt by coding out over more than one year if circumstances permit, be sensitive to the personal circumstances of taxpayers, for example, collecting a debt of 6,000 by coding out results in a reduction in new pay of 500 per month. Is that taxpayer able to survive financially with that reduction in net pay? 4.2 Communication is all important. ATT will be pleased to assist in reviewing drafts of proposed forms of explanation to taxpayers describing how and why an underpayment has arisen and how it is proposed to recover this by coding out, to give the taxpayer the opportunity to negotiate a different method of settlement. Your sincerely Paul Hill Chairman, ATT Technical Steering Group Note Founded in 1989, the Association of Taxation Technicians (ATT) is a charity and the leading professional body for those providing UK tax compliance services and related activities. Our members are qualified by examination and practical experience to assist individuals and businesses in complying with their tax obligations. The primary objective of the Association is to promote education and the study of administration and practice of taxation. One of the key aims is to provide an appropriate qualification for individuals who undertake tax compliance work. Those who meet the membership requirements have their qualification recognised by use of the title of Taxation Technician and the designatory letters ATT. The Association has recently admitted its 7,000th member and now has over 10,900 Fellows, members and registered students. P/ATTTSG/Submissions/2013 5