PAYE Contributions

John Bercow Excerpts

Wednesday 8th September 2010 Commons Chamber

[Stewart Hosie (Dundee East) (SNP)]

(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on the reported errors made by Her Majesty’s Revenue and Customs that appear to have led to millions of people underpaying or overpaying billions of pounds of pay-as-you-earn contributions.

[Mr Speaker]

Order. I should be grateful if hon. and right hon. Members who are leaving the Chamber would do so quickly and quietly so that the Minister, Mr. David Gauke, can respond to the urgent question.

[The Exchequer Secretary to the Treasury (Mr David Gauke)]

I am grateful for the opportunity to make a statement to the House about the action that HMRC is taking to rectify overpayments and underpayments in the PAYE system.

The PAYE reconciliation process occurs every year to reflect the changes in people’s earnings and employment status that happen over the course of a tax year. In previous years, HMRC employed a system of manually joining up separate pieces of information through PAYE. Each case of potential overpayment or underpayment had to be reviewed individually before reconciliation could be finalised. That was inefficient and clerically intensive work, and it resulted in a backlog of open cases. HMRC now employs a new computer system that matches records automatically to ensure that the correct amount of tax is paid.

The coalition Government have already started to look at how to reform PAYE further and make it more efficient. As part of the Government’s strategy to create the most competitive tax system in the G20, we are consulting on options to improve PAYE. The PAYE system was introduced at a time when people had one job—perhaps the same job for their whole career—and one source of income in retirement. However, that world has now gone and it is common for people to have earnings from multiple sources. That is well known, but it is something that the previous Government failed to address.

No reconciliation process was undertaken last year, so this year HMRC had to complete the reconciliation for two years instead of one. The preliminary assessment of this year’s reconciliation was first brought to my attention earlier in the summer, and while the majority of PAYE records are correct, we are acting promptly to put right the situation that we inherited, which has contributed to the number of individuals required to make payments and the size of payments owed. About 4.3 million taxpayers will receive repayments between now and Christmas, while 1.4 million will be sent letters specifying how any underpayment has been calculated and how such payments can be reviewed.

To begin the process of reconciliation, HMRC has sent out the first set of taxpayer notifications to individuals throughout the UK. Those individuals who have overpaid will receive a full refund. Those who have underpaid will make additional payments through the PAYE system, provided that the payment due is less than £2,000. If the payment due is more than £2,000, HMRC will contact the individual to discuss the issue. All payments will begin next year and no immediate one-off payment will be required. HMRC will review the responses to the first set of notifications and make any changes needed to operational plans before going ahead with the rest. Staggering the process between now and Christmas will help to ensure that HMRC can deal with all queries efficiently.

The Exchequer is owed a total of approximately £2 billion. The fact that we were left with the worst deficit in peacetime history means that we simply cannot afford to write off all the underpayments. To ensure that the tax system is fair for everyone and that everyone pays their fair share, we are taking action to recoup the funds as painlessly as possible. In cases of genuine hardship, HMRC will allow payments to be spread across a period of three years. As was already the case, it will not pursue cases when the amount owed is less than £300—that is an increase from the previous threshold of £50—which applies to 40% of all underpayments. Of course, in specific circumstances, HMRC will consider writing off underpayments where it can be shown that HMRC was provided with all the information necessary—although I have to tell the House, from historical experience, that that is unlikely to apply to many cases. We do not want to build up people’s hopes unrealistically.

This Government understand that there is an urgent need to reform our PAYE system. In opposition and from day one in government, we have sought ways to improve it. The system is outdated, inefficient and burdensome to the Exchequer and taxpayer alike. We need PAYE to reflect the employment issues that the 21st century presents, and that will be a focus of reforms that we take forward as part of our wider strategy for reform.

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[Mr Gauke]

I think we now know why Labour Members did not table an urgent question on this matter.

The right hon. Gentleman asked many questions—although there was not a word of apology for a tax system that is clearly encountering some difficulties—and I will endeavour to answer them all. First, there has been no change of plan. We have pursued the same proposal all along, namely to write to 45,000 to 50,000 taxpayers. We will use the information and the lessons learned from this relatively small sample to guide how correspondence will be undertaken with the remaining taxpayers affected. Let me reassure him that his fears about that are wrong. He also expressed concern about the public not being informed about the exercise, but we made great efforts to inform them over the weekend immediately after the decision was taken to proceed with writing those first letters to affected taxpayers.

The right hon. Gentleman referred to a concession that may be available, and he may recall that the A19 concession is available in circumstances where all the information has been provided to HMRC and it has had the opportunity to address it. We have looked into this. The A19 concession, which is well established—he will remember it from his time in the Treasury—does not apply that often in practice, and I do not want people to build up their hopes that it will offer some kind of panacea; that would be unfair on taxpayers.

The right hon. Gentleman questioned whether employers have made mistakes. In some circumstances, employers will have made the mistake that caused the overpayment or underpayment, but the principle remains the same—we have to collect the right amount of tax.

The right hon. Gentleman asked about means-tested benefits. In some cases, because net income was higher in a previous year, certain means-tested benefits would not have been available in that year, so sums are now having to be paid back. In those particular cases where tax underpayments are being recovered through the tax coding system, the corresponding fall in the net income for the taxpayer will increase the availability of means-tested benefits in that relevant year.

The right hon. Gentleman asked about the extension of tax credit renewals’ deadline, and I can confirm that it has been extended to provide additional time for claims. I have to point out to him, however, that the idea that call centres are under strain and that it is difficult to get through to HMRC is not entirely a new phenomenon: it is a long-standing problem. Let me take this opportunity to say to taxpayers who are understandably concerned about their position that they should wait until they receive a letter before contacting HMRC, as only then will it be able to deal effectively and efficiently with their concerns. Nevertheless, he raises a legitimate issue about call centres. We are providing additional staff—there is additional capacity now and there will be after the tax credit renewal process has been completed. We are taking steps to ensure that HMRC is able to deal effectively with those calling in with concerns.

[Mr Speaker]

Order. I understand that the Minister is trying to help the House with informative replies, but I am afraid they are rather prolix and they need to get shorter.

[Nadhim Zahawi (Stratford-on-Avon) (Con)]

Does my hon. Friend agree that the previous Government ignored not only the crippling budget deficit but the serious problem with PAYE? That is evidence as to why the coalition’s setting up of the Office of Tax Simplification is so important.

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[Several hon. Members]

rose—

[Mr Speaker]

I call Matthew Elliott. [Interruption.] I mean Matthew Hancock. Tax was on my mind.

[Matthew Hancock (West Suffolk) (Con)]

The Minister said that one reason why some payments will have to be so big is that there has not been a reconciliation for two years. Can he explain why moneys were not required back from taxpayers up and down the country last year in the months running up to the general election?

[Mr Gauke]

My blood ran slightly cold for a moment when I thought that the TaxPayers Alliance had managed to get in here, but I know that my hon. Friend is a good representative for taxpayers. As for last year, it is fair to say that the introduction of the computer system was a relevant issue, but none the less the lack of a reconciliation has exacerbated the problem. The fact that nothing was done last year prior to the election has left us with a bigger problem this year. He can draw his own conclusions.

[Mr Speaker]

I apologise to the hon. Member for West Suffolk (Matthew Hancock); he is unmistakable.

[Mark Durkan (Foyle) (SDLP)]

May I ask the Minister whether these circumstances have given the Government any further thought about plans to cut the future capacity of the Revenue and Customs? If he is giving positive consideration to the very good suggestion that there be a helpline for MPs, may I suggest, since many of the people affected will not have accountants to hand or be able to go to them, that it be available also to citizens advice bureaux, which will get an awful lot of inquiries?