If HMRC calculate that you have underpaid tax but you think that the underpayment arises because your employer or pension payer failed to operate PAYE correctly, you have the right to challenge whether HMRC should ask your employer or pension payer to pay it instead.
Here, we aim to provide a guide to the law and advise you what to do next.
The guide is divided into the following sections:
PAYE is a three-party process, involving:
Its operation is set out in law, together with each of the parties’ responsibilities. Information can pass between all three and sometimes the system breaks down. The issue considered in this guide is whether the employer or pension payer has failed to do something they are required to do by law – for example, not acting on instructions received from HMRC or not following the correct procedure when taking on a new employee or pensioner.
When PAYE works properly and a correct code has been operated throughout the year, the tax paid should broadly equal the tax due. There can be small ‘rounding’ discrepancies of just a few pounds or pence but generally these are ignored.
Basically, those making payments under PAYE are required to follow the rules and deduct the right tax before paying the ‘net’ (after-tax) amount to the payee.
Mistakes can of course happen. Forms can get lost in the post (although these days, most exchanges between employers/pension providers and HMRC are done electronically) and there can be breakdowns in communication. It can be a very difficult task for you, the employee or pensioner, in receipt of an underpayment ‘P800’ or 'PA302' calculation from HMRC to work out why it has arisen. Usually, all you know is that you thought everything was fine until, out of the blue, you have been told otherwise.
Each of the three parties in the process could have been at fault:
In some cases, there might be a far more serious situation, where the employer or pension payer has not simply made an error, but they have been generally irresponsible in the way that they have operated PAYE or have deliberately not operated PAYE correctly.
HMRC records can often show whether or not an employer or pension payer has taken a range of steps to operate PAYE in accordance with HMRC’s instructions. HMRC should not issue a tax calculation without checking why an employer or pension payer has acted inappropriately.
You might think to ask your employer or pension payer what has gone wrong. But be very careful - this is not the role of the taxpayer and is unlikely to get a favourable (or a friendly) response. We recommend that you ask HMRC to investigate, as they are in a much stronger and better position to do so.
But when you are checking the P800 calculation, you should bear in mind the types of errors that employers or pension payers do make:
Note that prior to 2015/16, PAYE sources of income are grouped together on a P800 under the description PAYE income. You may need to add up the information on several P60's or P45's to arrive at the figure produced by HMRC. From 2015/16 income sources should be listed individually and should match your P60/P45 for that source.
If you suspect any of the above situations apply to you or that there has been some other error by your employer or pension payer, either deliberately or perhaps by way of poor administration, you should contact HMRC. You can telephone them, or alternatively write a letter.
HMRC’s guidance says that you should give details of what you think has gone wrong. You might of course not understand the detail, but still feel something has gone wrong which is not your fault. In that case, we recommend you ask HMRC if they have considered whether your employer or pension payer is in any way at fault. If they do not feel that there has been any error on the employer or pension payer’s part, you should get HMRC to explain why the underpayment has arisen. (It is unlikely that you have will have received an adequate explanation on the P800 issued by the computer – it might just say something bland like ‘The reason for the underpayment is given on the enclosed sheet’, but the only other sheet is the calculation itself.).
It is up to HMRC to review the situation and then tell you of their decision, which will be one of the following:
In the latter two situations, HMRC will need to issue a formal notice (a ‘Direction’) to both you and your employer or pension payer that they think you should pay the tax. You then have a right to appeal in writing to HMRC within 30 days against their Direction, either by way of HMRC’s internal review system or an independent tribunal. More information on appeals generally can be found in the ‘When things go wrong’ section of this website.
It is also possible that your tax underpayment has arisen for more than one reason – in which case, HMRC might consider that part of it is due to an employer or pension payer error, and part for other reasons. They could then treat each part of the tax bill differently – for example, agreeing to pursue your employer or pension payer for part of it and still asking you for the balance.
We would not be surprised if by now you are confused.
The key point is that you make contact with HMRC either by telephone or in writing to raise your concerns over the calculation you have been issued, and not to be easily deterred if you cannot get through or are initially declined what seems fair treatment.
When contacting HMRC, keep a note of your conversation and copies of any correspondence and papers sent to them, together with proof of postage.
As noted above, you do have rights and should not be afraid to exercise them. Indeed, LITRG campaigned successfully back in 2003 for HMRC to change the law so that appeal rights were included for taxpayers where their employer or pension payer has made an error.