It has emerged that hundreds of thousands of taxpayers may have paid the wrong amount of tax after the Inland Revenue admitted that it had accidentally deleted an undeclared number of taxpayers’ records.

The Revenue has told TaxZone there was no question of anyone being asked to pay more tax as a result of the deletions. A leading tax expert said that only individual taxpayers would be able to correct their tax position.

Records on the computerised PAYE system were deleted before the Revenue had completed its end-of-year review to check whether there had been any underpayment or overpayment of tax. The number of taxpayers affected remains undeclared after a year-long investigation.

Richard Bacon, Conservative MP and a member of the Commons public accounts committee, said that “sloppy” procedures meant that the Revenue had been accidentally deleting personal tax files for years, reports said.

Bacon demanded a National Audit Office inquiry, and said in a letter to auditor general Sir John Bourn, head of the NAO: “Since the Revenue holds over 30m records, this issue could easily affect many hundreds of thousands of taxpayers … How an organisation doing something as important as the Inland Revenue can be so sloppy as accidentally to delete potentially large quantities of data is difficult to understand.”

Housekeeping routine
The NAO’s 41-page report on the Revenue’s 2003/04 accounts, issued on 21 October, said in a single paragraph: “The Department became aware in the autumn of 2003 that a well established and accepted housekeeping routine on the PAYE computer databases had for a number of years deleted some records before the usual final review to check whether any tax remains overpaid or underpaid for the relevant year.

“This means that some customers will not have received the repayment to which they may have been entitled and others may owe tax which has not been collected. As the records have been deleted there is no way of identifying those whose records were open when the process was run. This routine has been corrected. The department is carrying out further work to establish the full effect, including a statistically valid sample exercise to determine the average level of repayment due. It will then decide how best to deal with the problem.”

Repayments ‘can and will be made’ on basis of P45
The Revenue told TaxZone it was continuing to analyse the position, and emphasised that the problem had been fixed and could not happen again. The result of an internal inquiry would be reported to Parliament.

There was no question of anyone being asked to pay more tax as a result of the deletions, a spokesman said, adding that the range of taxpayers affected was narrow, being limited to “those who left employment three years ago and did not start work again or begin drawing a pension”.

The spokesman added: “Repayments of tax can and will be made on the basis of the details given to those who leave employment, on the back of their P45.”

‘Only individuals’ can correct their tax position
Anne Redston, chairman of the Chartered Institute of Taxation’s personal taxes sub-committee, told TaxZone it seemed that the people most likely to be affected were those who had worked for say, six months on a PAYE code that was based on the assumption that they would be working for a full year. If they left after six months they would not have had the benefit of a full year’s personal allowance.

She added: “The interesting question is what these people did. If they are not living on a pension or a salary, they may be living with a partner who is supporting them, or may have gone to live abroad, in which case they probably have overpaid tax and they ought to claim it back.

“There may be underpayments too, which would come to light if they had been sent a self assessment return. Maybe they went self-employed or did some casual work.”

It was very difficult to tell the effect of a hole appearing because records had been deleted, Redston said, but if this problem rang a bell with people who might not have used their full personal allowance, they might want to review their position and claim any overpayment.

From the Treasury’s position, there may be underpayments as well. Redston said a sampling exercise might give the Revenue an indication of how much was in the hole, but it would not tell them who had underpaid or overpaid. “Only individuals will be able to correct their position,” she said.

Redston added: “This is not the first time there has been an issue with Revenue systems and file deletion, and it would be nice if it was the last. It may be worth someone, as part of the newly merged Revenue and Customs office, taking a cold, clear look at their normal routines to see if there are opportunities for improvement and minimising the risk of this happening again. It would be a disaster if we lost more data in a merger of the systems.”

Andrew Goodall
editor@taxzone.co.uk