3. Mr H complains that HMRC has not agreed to set aside tax underpayments caused by its own errors.
4. He says this has caused a significant financial impact for him and his family. He has also experienced stress and worry about the situation.
5. Mr H wants HMRC to set aside the underpayments in full.
6. HMRC claims £6,476.47 in underpaid tax from Mr H. This is made up of £775.61 for 2021/22 and £5,700.86 for 2022/23. It says the 2021/22 sum is the result of Mr H receiving too much tax-free allowance with 2022/23 caused by insufficient tax paid at a higher rate.
7. HMRC says the underpayment total is due in full because Mr H’s cases do not meet the criteria to set this aside (write it off).
8. The Adjudicator’s Office (AO – the second-tier complaint handling organisation in HMRC’s complaints process) agrees with HMRC.
11. Before we decide if we should consider a complaint further, we look at whether there are signs the organisation has got something wrong. We do this by comparing what should have happened with what did happen. We have done this and have not found any indications that something went wrong when HMRC decided not to give up Mr H’s tax underpayment.
2021/22
12. At the start of the 2021/22 tax year Mr H was employed by Company A. His tax code for this employment was 135L.
13. As part of his tax code, Mr H had a personal allowance – the amount he could earn before tax became due. Tax codes are used with the aim of collecting the right amount of tax in real time. When this does not happen, it does not necessarily mean the tax due will not be collected. HMRC is entitled to collect the correct amount of tax due, even if this is after the time it should have been collected. This applies even when the employer or HMRC is at fault.
14. Mr H left his job in December 2021 and started to receive a pension from Company A in January 2022. HMRC sent him a new coding notice in February which explained that although his code (135L) would remain the same, this would no longer be on a ‘cumulative basis’ but on a ‘week 1/month 1’ or ‘non-cumulative basis’.
15. With a cumulative basis, the employer takes into account any previous pay and tax for the year. The employer deducts more or less tax, or makes a refund, as the rate of pay rises or falls. A cumulative basis means that the amount of tax deducted during the year will be roughly correct for most cases.
16. The week 1/month 1 (non-cumulative) basis ignores previous pay and tax, meaning all payments are taxed as though it was week 1 or month 1 of the tax year. The aim of this is to prevent the employer making heavy deductions or giving any refund.
17. PAYE76110 says that pension providers should use a taxpayer’s existing tax code on a non-cumulative basis when they start to pay a pension. Company A therefore used tax code 135L when it stopped paying Mr H a salary and started paying him a pension instead in line with HMRC’s guidance.
18. Unfortunately, this caused Mr H to underpay tax during January, February and March 2022. This was because his personal allowance ‘reset’ each month meaning he was taxed on less of his pension than he should have been.
19. In addition, Mr H started to work for Company B in February 2022. It also used 135L because this was the code noted on the P45 Mr H received when he stopped working for Company A. This meant his personal allowance was duplicated by Company B when it paid Mr H in February.
20. Because the same code was used by both Company A (pension) and Company B (salary) during the same period, it led to a further underpayment. As well as underpaying on his pension for three months, he also underpaid on his salary because his personal allowance was duplicated in one of those months.
21. HMRC told Mr H in March 2022 that he had underpaid tax by £1,449.14 and would collect this through his tax coding notice for 2022/2023. Mr H contacted it in April 2022 to explain that his income had been less than HMRC had used to calculate the underpayment. HMRC amended this accordingly and told Mr H in May that the underpayment was in fact £775.61.
22. Both HMRC and the AO have considered whether ‘ESC A19’ applies to this underpayment. ESC A19, or Extra Statutory Concession A19, is part of HMRC’s PAYE (Pay As You Earn – tax matters that apply to employed people) Manual. It provides HMRC with limited discretion to determine whether it should give up collection of tax in instances where an unexpected tax bill has arisen.
23. ESC A19 includes provision for a tax underpayment arising from a HMRC error. It explains that outstanding tax might be given up if this results from its failure ‘to make proper and timely use of information supplied by a taxpayer about his or her own income, gains or personal circumstances, or an employer if the information affects a taxpayer’s coding’.
24. It goes on to set out that ‘tax will normally be given up only if the taxpayer could reasonably have believed that his or her tax affairs were in order and was notified of the arrears more than 12 months after the end of the tax year in which HMRC received the information indicating that more tax was due’.
25. In Mr H’s case, it does not seem that a HMRC error caused the underpayment. Even if HMRC had made a mistake, the second part of the criteria does not apply as it told Mr H about the underpayment within the same tax year it occurred in.
26. We acknowledge how upsetting and worrying it must have been for Mr H to be unexpectedly told he owed tax for 2021/22. Unfortunately, HMRC is entitled to collect the underpayment from him even though this may not have occurred through any fault of his own. As ESC A19 does not apply in this instance, HMRC has correctly said that Mr H must pay the sum claimed from him.
2022/23
27. Mr H’s April 2022 contact about his 2021/22 underpayment prompted HMRC to review his 2022/23 tax code. It had changed his main income source from his Company A pension to his Company B salary because the total pension payment was higher than the total salary payment. This resulted in HMRC sending a coding notice of D0 to Mr H for his pension income. D0 means the higher rate of 40% tax is collected on all income. This is generally used when a taxpayer’s personal allowance is being applied to another source of income – in this case Mr H’s Company B salary.
28. HMRC used tax code 1157L for Mr H’s salary. This had been adjusted from 135L to allow for collection of the £775.61 underpayment from 2021/22. Company B used this code until Mr H left his job there in July 2022.
29. Mr H started a new job within Company C at the end of September. Company C notified HMRC of this at the start of October and told it that it had used tax code BR. BR refers to the Basic Rate of tax – 20% - and is used when a new employee tells their employer they have another job or pension.
30. When Company C reported Mr H’s employment, it told HMRC his salary for that month. HMRC incorrectly used this sum as his annual salary. PAYE13090 says it should instead have multiplied this sum by the number of months remaining in the tax year.
31. Because of this error, it then looked like Mr H’s pension was his main source of income. This led to HMRC issuing a new tax coding notice to Mr H in October 2022 to explain his pension would be taxed using code 963L, with his Company C salary being taxed at BR.
32. These codes were used from October until the end of the tax year in April 2023. This created three issues. First, the 2021/22 underpayment that was due to be collected during this time was not fully repaid. Secondly, Mr H did not pay enough tax on his Company C salary during this time. Thirdly, Company A refunded tax Mr H had paid previously. This was because the code HMRC gave it in October 2022 included a personal allowance which had not been the case since March 2022. Company A made payments of £1,879.20, £549.93 and £247.33 in November and December 2022 and January 2023 respectively. Mr H was not in fact entitled to this refund – which totalled £2,676.46 – it was one of the consequences of HMRC’s coding error.
33. Together this meant Mr H unpaid tax during the 2022/23 tax year by £5,700.86 (including the incorrect refund of £2,676.46). HMRC wrote to Mr H to notify him of this in September 2023. We note that Mr H told HMRC he accepted he had likely underpaid tax during this period.
34. Again, HMRC and the AO considered whether ESC A19 applied to this underpayment. They both explained that this was unfortunately not the case and so this could not be set aside. Although there was no dispute that HMRC’s error had caused the underpayment, it told Mr H about this within 12 months of the tax year ending. HMRC had until April 2024 to notify him about the underpayment occurring within the tax year that ended in April 2023. It did this in September, well within the permitted time.
35. We recognise how upsetting and worrying it must have been for Mr H to receive tax bills – particularly when one of these was significant and caused by a HMRC mistake. Nonetheless, HMRC is entitled to collect the correct amount of tax due. Therefore, whilst we accept it may seem unfair to Mr H, we consider that HMRC and the AO correctly concluded that HMRC is entitled to claim back the underpayments from him.
1. We have carefully considered Mr H’s complaint about HM Revenue and Customs (HMRC). We were sorry to hear about the significant, and unexpected, tax bills he received and the worry and stress this caused him.
2. We consider that HMRC was right not to set aside the tax claimed. Although most of the underpayment was the result of an error on HMRC’s part, it correctly determined that it cannot write this off and is, therefore, still entitled to collect the right amount of tax due.