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Accountant & Tax Consultant  76 Milfoil Drive Eastbourne and 3-4 Devonshire Terrace Broadstairs

The National Audit Office (NAO) has just finished its review of HM Revenue & Customs’ (HMRC) “Accuracy in processing Income Tax” through Self Assessment and PAYE.

The report covers:

For the purposes of this report “ensuring that people pay the right amount of tax depends on them correctly declaring all their income and on the Department (HMRC) correctly processing the information they provide”; so “the right amount of tax” in this particular instance has nothing to do with tax planning, tax avoidance or Chancellor’s speeches.

Given the complexity of the UK’s tax system, it comes as no surprise to read that the NAO has discovered that phrase “processing accuracy” is an oxymoron where PAYE codings are concerned. The statistics published are not terribly easy to follow, but by all accounts, 95.4% of Income Tax cases were correctly calculated. HMRC has improved its accuracy in processing Self Assessment cases since 2001-02, achieving 96.5 per cent in 2006-07, slightly missing its target of 97 per cent. Over this period, accuracy in processing PAYE cases fell slightly although it improved to 95.1 per cent during 2006-07.

There were around 3.6 million errors on Self Assessment and 2.8 million errors on PAYE in 2006-07 and HMRC deals with the tax affairs of 36 million taxpayers, the upshot of which is that at least a million taxpayers are paying the wrong amount of tax, because HMRC has not been calculating it correctly.

PAYE: the trouble maker?
The report says that in 2006-07, 63 per cent of all errors in PAYE affecting the tax payable related to tax codes and, around 25 per cent of PAYE cases are so complex that they require processing by hand. This process is more prone to error though and so only has an accuracy rate of 82.1 per cent (2006-07). Some other errors result in mistakes in taxpayers’ records, such as incorrectly logging address or personal details, do not directly affect the tax payable, and so are not immediately quantifiable. If they remain uncorrected they could in time affect the tax due.

For the taxpayer, the average underpayment and overpayment of tax is around £250 and £290 respectively, and processing errors are more likely to affect certain groups of taxpayers whose income tax affairs are more complicated, such as people on pensions, agency workers, those with several jobs or sources of income and those who receive benefits in kind.

Staffing issues
The report highlights the fact that higher accuracy rates are associated with experienced, well trained staff, lower staff turnover and workloads that require less processing by hand. Accuracy depends on moral; HMRC staff are happiest in non-urban offices, having a smaller office, with low rates of absenteeism (sickness) is more likely to increase accuracy, the reverse is true if you work in an office which has had a lot of leavers and temps.

The approach taken to HR varies according to the management style of different offices but poor training is singled out, combined with a new practice put forward as part of the Pacesetter program of change. A new working initiative goes under the name of “Lean”. Lean working essentially tries to cut costs by making a process more efficient; it is the equivalent to creating a modern production line. Under Lean working an SA return may be processed by a number of different staff, each having relevant expertise for their section. This has improved accuracy rates, but the process takes longer and staff are not terrifically happy at the automation of the process, describing themselves as “demoralised, bored, deskilled and felt that they were not getting the necessary training to do a quality job processing a tax that is very complex”. The Lean initiative is still under review.

Overall Conclusion and Recommendations
The report says that full cost of errors is largely hidden – in reworking cases to correct mistakes and in the time, cost and anxiety for taxpayers in getting errors put right. It points out that such errors also disproportionately affect more vulnerable groups who are probably less able to deal with them. PAYE errors are far more variable than SA, which reflects the complexity of processing.

The common errors are listed as:

Errors that do not directly affect the tax liability:

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