Code quirk can lead to be­ing taxed twice

The Daily Telegraph - Your Money - - FRONT PAGE - Sam Mead­ows

Tax­pay­ers could lose their per­sonal al­lowance or end up pay­ing tax twice thanks to teething prob­lems with HM Rev­enue & Cus­toms’ dig­i­tal sys­tems.

While the Mak­ing Tax Dig­i­tal cam­paign, the Gov­ern­ment’s at­tempt to bring its sys­tems up to date, has largely been halted amid Brexit ne­go­ti­a­tions, cracks are be­gin­ning to ap­pear in the changes al­ready made.

Us­ing “dy­namic cod­ing”, in­tro­duced last year, HMRC now up­dates tax codes through­out the year in or­der to ad­dress any un­der or over­pay­ments.

This is meant to re­duce instances of tax­pay­ers over­pay­ing and hav­ing to wait un­til the end of the tax year to re­ceive a re­fund, as the ad­just­ments can be made im­me­di­ately.

But tax prac­ti­tion­ers say a num­ber of peo­ple are fac­ing prob­lems. If you re­ceive a large bonus early in the year, HMRC’s sys­tem ex­trap­o­lates that bumper pay­check across the year and mas­sively over­es­ti­mates the per­son’s an­nual in­come.

If the fig­ure sur­passes £100,000 the per­son’s tax-free al­lowance of £11,850 will be re­duced or elim­i­nated en­tirely – lead­ing to over­pay­ments.

HMRC said this wasn’t a prob­lem only with dy­namic cod­ing, as it could have hap­pened be­fore, but the new sys­tem means the prob­lem arises in­stantly.

He­len Thorn­ley, of the As­so­ci­a­tion of Tax­a­tion Tech­ni­cians, said: “We’ve heard of this hap­pen­ing to quite a few peo­ple.

“The UK’s tax sys­tem is so com­pli­cated that this process would need to be very com­plex to deal with ev­ery­thing. To be fair to HMRC, it doesn’t de­sign the rules and the prin­ci­ple of dy­namic cod­ing is a good one. But it needs to work.”

To fix the prob­lem, tax­pay­ers need to log on to their on­line “per­sonal tax ac­count” and sug­gest a change to es­ti­mated in­come.

An HMRC spokesman apol­o­gised to cus­tomers who had been af­fected.

Sep­a­rately, some tax­pay­ers are at risk of be­ing billed twice due to a clash be­tween the new dig­i­tal sys­tem and self-as­sess­ment.

Peo­ple who un­der­paid tax in 2017-18 will al­ready have re­paid the sum, thanks to dy­namic cod­ing. But ac­coun­tants warn that if that per­son needs to de­clare ad­di­tional in­come, their tax re­turn could be pre­pop­u­lated by HMRC and in­clude the un­der­pay­ment. If a tax­payer doesn’t cor­rect it, they could pay twice.

HMRC’s spokesman apol­o­gised for out-of­date in­for­ma­tion on some re­turns but added that no tax had yet been asked for. Fol­low­ing Tele­graph Money’s in­quiry, the ac­counts af­fected are be­ing up­dated.

Dy­namic cod­ing was in­tro­duced last sum­mer and was hailed by Mike Pot­ter, HMRC’s dig­i­tal chief, as the “big­gest change since Pay As You Earn was in­tro­duced in the For­ties”.

Iain McCluskey of PwC, the ac­coun­tancy firm, said: “This is a big trans­for­ma­tion – the sim­pli­fi­ca­tion of our tax sys­tem af­fects ev­ery­one. The di­rec­tion of travel is ab­so­lutely right, but where these bumps in the road do hap­pen, HMRC needs to deal with them prop­erly.”

Tax­pay­ers should not as­sume that dig­i­tal tax al­ways adds up

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