1 February 2011 Last updated at 05:26 ET

Tax computer system condemned as 'flawed' by MPs

Margaret Hodge MP: 'there must be better personal responsibility'

A committee of MPs has criticised the UK tax authority over its management of the income tax system.

The Public Accounts Committee described the implementation of a new PAYE computer system used by HM Revenue and Customs (HMRC) as "flawed".

It said up to 22 million people had not been taxed accurately since 2004-05 causing "unacceptable uncertainty and inconvenience".

HMRC said the new computer system was now improving fairness in the system.

New computer

The problems were first highlighted last September when HMRC told taxpayers that a new computer system for managing the PAYE system had revealed 6.6 million people who had overpaid or underpaid tax in the two years 2008-10.

Most individuals have subsequently been sent letters either asking them to pay more, or containing a refund.

Following public questioning of senior HMRC officials, the MPs said that a backlog of a further 15 million people on the PAYE system have still not had their tax affairs settled for the years 2004-05 to 2007-08.

"HMRC's mismanagement has caused uncertainty and worry to taxpayers and inequity in the system," said Margaret Hodge, who chairs the committee.

"We now look to the department to be able to demonstrate clearly by the end of 2011 that NPS can process PAYE promptly, accurately and efficiently.

"Taxpayer confidence must be restored," she demanded.

New system

HMRC started using a new National Insurance and PAYE Service (NPS) computer system in 2009.

It brought together data previously spread around 12 different regional databases, which meant taxpayers' details had often been cross-checked manually.

But this had led to mistakes which were then flushed out by the new system.

Software problems with the new computer delayed the processing of the 2008-09 PAYE details for a year, with a delay in telling the seven million affected taxpayers about them.

This was compounded by further additional disruption when, in January 2010, the HMRC discovered it had mistakenly issued nearly 26 million new tax codes to taxpayers, almost twice as many as it had been expecting.

"The department [HMRC] knew that seven million people had overpaid or underpaid tax in 2008-09 but took no action and did not start informing individuals until September 2010 because of problems with the new computer system," said Mrs Hodge.

Improvement

Owing to a new, reduced, four-year deadline on collecting tax introduced in 2008, an estimated £650m in tax that was underpaid in the three years from 2004-05 to 2006-07 could not be hauled in.

The committee said that HMRC "failed to understand" the effect of this deadline.

The MPs estimate that, based on information from the Revenue, about £1.4bn was underpaid in 2004 to 2008, while at the same time £3bn was overpaid.

Then, when the new system was in operation between 2008-2010, 4.3 million people overpaid £2bn while 1.4 million people underpaid £1.8bn.

A further 900,000 taxpayers have been exempted from repaying £160m between them on the grounds that the debts were lower than £300 each.

The MPs criticised the decision to write off these sums. Previously only amounts of less than £50 had been written off.

They also demanded that everyone's PAYE should be processed within 12 months of the end of the tax year.

A spokeswoman for the HMRC said: "We will consider the PAC's report in detail and respond in due course.

"We recognise the uncertainty and concern caused to people by unexpected tax bills. The new computer system is now allowing us to bring taxpayers' records up to date, improving the accuracy and fairness of the tax system for the future."