The National Audit Office (NAO) published its annual report on HMRC's performance at the end of July and it was far from glowing. The report contained a series of damning statements, painting a chaotic picture of constant under-performance and a heavily flawed system falling far short of requirements.
We’ve pinpointed some of the most salient quotes from Amyas Morse, head of the National Audit Office:
"The Department has not made enough progress in reducing the backlog of 18.2 million income tax cases where there is potentially overpaid or underpaid tax. It also needs to improve its collection rate for tax credits debt, which is substantially lower than that for tax debts. "The administration of tax in 2009-2010 by HM Revenue and Customs has been influenced by three broader issues: the recession, which has increased the value of tax debt to be recovered; the pressure on the Department to streamline its processes; and the effectiveness of its information systems. "Those systems need to be developed so they improve the Department's ability to monitor and assess the targeting and performance of its debt collection campaigns and to design future interventions in the areas of greatest risk."
Just as an aside, so you can get some idea of where HMRC is, the 18.2 million cases referred to above by the NAO (and which are still awaiting resolution) actually arise from the tax years 2007-08 and earlier! The initial estimate is that around half of these cases are likely to involve an over or underpayment of tax and these may lead to repayments and recoveries in the region of £3.0 billion and £1.4 billion respectively. The exact amounts of tax over and underpaid however is an unknown quantity at this stage and will not be known until they are processed.
Without doubt, some taxpayers are going to receive tax demands when they understood their tax affairs to be up to date. And the estimate for how long it will take to clear the backlog? The NAO report said that the expected timeline was 4 years.
National Audit Office on the new National Insurance and PAYE system.
So what lead to this backlog? Well, as many of you may be aware, HMRC has been upgrading its IT systems over the last few years and the delays with the development have been the primary contributor. Here is a summary of what the NAO had to say about the IT system implementation (be warned: it's not for the faint hearted):
“The introduction of the new Service [the new IT system] has been difficult. The Department originally planned to implement it in June 2008 but this was twice deferred; first to complete aspects of its development and second to satisfy itself that the system infrastructure would meet operational demands.
“The re-phased implementation began in June 2009, with the full system functionality completed in April 2010 following the final software release. Although the initial implementation went well, problems in the quality of the Department’s employment data and operation of the new Service have contributed to subsequent difficulties in processing:
- up to seven million potential over and underpayments of tax have yet to be processed as a result of delays in loading 2008-09 end of year returns onto the new Service. In addition, erroneous employment records have been generated due to the new Service’s inability to match some of the end of year returns to existing records;
- work items (processing exceptions requiring manual review) were created at a much faster rate than the Department’s operational team were ready to handle. To avoid breaching its 12.5 million capacity limit, the seven million potential over and underpayment items relating to the 2008-09 end of year processing were removed from the Department’s new work management system. It now plans to begin the reconciliation of 2008-09 over and underpayments in August 2010; and
- significantly more amendments to tax codes were calculated than expected when the new Service first supported the annual generation of tax codes used by employers to calculate tax deductions from pay. The Department found that the new Service had the potential to generate up to 25 million coding notices, almost double the 13 million anticipated. A significant number of the amended codes were incorrect.”
Alarmingly, HMRC only seemed to fully appreciate the scale of the data inaccuracies when the annual coding emerged in January 2010. It launched a recovery programme which involved reviewing a staggering 9 million records that fell into the at-risk category.
The most salient point, however, is that many of the people whom may not be aware that they have overpaid tax and are due a refund are liable to make further payments.
The fundamental problems with the new service are unlikely to be fixed until 2011. We’ll keep you updated as to the HMRC saga as it unfolds.