Workers' underpaid tax bills 'could be written off'

Under tax rules HMRC must issue demands for underpaid tax within 12 months of the end of the tax year in which it became aware that people had underpaid.

It emerged over the weekend that nearly six million people have paid the wrong amount of tax through the Pay As You Earn (PAYE) system.

Around 4.3 million of these have paid too much and are due a refund, but 1.4 million have underpaid and will have to handover an average of £1,428 each.

But if people provided HMRC with all the information they needed to get their tax code right, it should have used this information within 12 months of the end of the tax year in which it was received to claw back the extra money.

If HMRC failed to do this, taxpayers can ask for an Extra Statutory Concession, also known as an ESC A19.

The latest round of errors date back to April 2008, meaning anyone who alerted HMRC to changes in their circumstances that affected their tax code before the start of the new tax year in April 2009 may be able to cite this clause.

Angela Beech, partner at chartered accountants Blick Rothenberg, said: "Those that receive these demands need to think before they automatically pay up.

"If you had given HMRC information that would have enabled them to adjust your tax code to make sure that you did pay the right amount of tax, then, if the time limit has passed for them to use that information, they cannot pursue you for the unpaid tax."

She said HMRC were likely to ask for proof that people had informed them about a change to their circumstances.

But she added: "If you have got evidence or know that you supplied information, then you really should consider appealing against the demand to pay."

An HMRC spokesman said: "HMRC can consider writing off the underpayment in certain circumstances.

"Basically these are if HMRC had been provided with all the information necessary to get their tax right and the taxpayer could have reasonably expected their tax deductions to be right.

"In these circumstances they need to contact HMRC and ask for the underpayment to be reviewed on that basis."

A total of £2 billion has been underpaid through the PAYE system over the past two years, while £1.8 billion has been overpaid.

HMRC has begun sending out the first 45,000 letters to people who are affected, around 30,000 of whom are due a rebate, while 15,000 have underpaid tax.

The remainder of the 5.7 million people affected will be contacted between now and Christmas.

People who have underpaid and owe less than £2,000 will be able to have the money deducted from their salary on a monthly basis during the 2010/2011 tax year.

But those who owe more than £2,000 will have to pay it to HMRC in a lump sum.

It is believed that in some cases, individuals may face both under and overpayments, which could cancel each other out.

Every year HMRC checks that the amount of tax and National Insurance deducted by the employer matches the information held on its records.

The wrong amount of tax may have been paid if people failed to tell HMRC about a change to their circumstances, such as starting a new job, having more than one job, or receiving a new benefit through work, such as a company car.

A high number of discrepancies have been thrown up this year due to the use of a new IT system, which holds all the information on an employee in one place, rather than having it spread over several different systems.

However, the new system should mean that going forward more people pay the right amount of tax through the PAYE system than previously.