HMRC issuing incorrect PAYE tax codes – what to do?

May 24, 2013

Author: Adrian Hobbs

It is reported that HMRC are issuing employers, payroll bureaus, and agents with new PAYE tax codes that are incorrect. There is a solution, but not one you’ll want to hear.

On 22 May, Kate Upcraft, an independent payroll consultant, reported that over the last week she has been hearing about a flood of PAYE tax code notices being issued by HMRC that do not appear to be correct when compared to the last code in operation:

  • Codes where employees with benefits-in-kind have now been put back on to a full 944L code.
  • BR and D0 codes being issued to employees who previously had standard codes.

Linda Pullan, Head of Payroll Alliance, reports that one Payroll Alliance member told them they had received 150 new codes out of a payroll of 800. Other members reported receiving multiple tax codes for the same employee, and in some cases the code changes were dated the same day!

As a result of reports by Payroll Alliance members about the number of new tax codes they had received from HMRC, Linda raised this issue with HMRC on 17 May through the Employer’s Consultation Forum. Kate also reports that the issue was raised with HMRC last week through the Computer User Group, a special representative body set up to work with HMRC on RTI issues.

On 21 May, HMRC published a statement about what was causing the issuing of so many tax codes. And they blamed employers!

HMRC claim that the issuing of new tax codes is due to employers failing to include all their employees on the Employer Alignment Submission and/or first Full Payment Summary they sent HMRC. In some cases, HMRC said that employers sending an EAS submission in parts had failed to let them know what they were doing with the result that HMRC only accepted the first part of the EAS, and ignored all other parts.

In other words, if HMRC did not receive data about a particular employee they treated that individual as a ‘leaver’ as at 5 April 2013. Then when the employer sent in an FPS with that employee’s data on it, HMRC treated them as a ‘starter’ and set them up with a new employment record from 6 April 2013. This took no account, for example, that the employee may have had a previous tax code accounting for benefits in kind (such as a company car) with the result that HMRC issued a basic tax code for the employee. Operating this code will lead to an underpayment of income tax, through no fault of the employee!

HMRC’s answer to the problem of ‘suspect’ tax codes?

“Employers should not operate the incorrect codes. They should continue to use the previous code. If an employer or an employee receives a tax code where the benefits have been removed, they should get in touch with HMRC’s Taxes Helpline on 0845 300 0627 to get the benefits added back in and the code corrected.”

Kate Upcraft, commenting on this HMRC suggestion, says: “Even if that course of action were to be adopted how does an employer know which codes are right or wrong? And unless they are warned by their software that a code has been applied with a significant change they potentially have no visibility of codes that have been applied as these are actioned automatically for many large employers.”

“Ringing the Taxes Helpline as suggested by HMRC will be time consuming” Kate says, “Also, as HMRC will not discuss the make-up of an employee code with an employer, only confirm it; it seems the only real course of action that will produce the right outcome for the taxpayer is for them to be inconvenienced by having to ring up HMRC themselves.”

However, as Kate points out, the above may explain why an employee with benefits-in-kind has been put back on to a full 944L tax code; it does not seem to explain the unexpected BR and D0 tax codes that HMRC have been issuing the last few weeks.

Linda Pullan makes a similar point when she says: “Although HMRC have identified an alignment error, which may apply to some employers, I believe there is a far wider problem here that needs investigation. I have asked HMRC to look at this again and it has now been referred to their Issues Resolution Forum.”

This whole deplorable state of affairs is likely to have serious consequences for many employees and their employers. Where an employer operates a new PAYE tax code that it is subsequently found to be incorrect, is it really the employer’s fault?. They are usually told by HMRC, if querying a tax code, ‘don’t concern yourself with the detail; just get on and operate the code!’

But who will employees blame if they get notification of an underpayment of income tax because a tax code was issued incorrectly? It won’t be HMRC; it’ll be the employer! Even if an employee ends up with a tax refund, they aren’t going to be that pleased they’ve had to wait to receive the full benefit of their wages.

Sorry to be so blunt – but the whole thing stinks!