(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on the reported errors made by Her Majesty’s Revenue and Customs that appear to have led to millions of people underpaying or overpaying billions of pounds of pay-as-you-earn contributions.
I am grateful for the opportunity to make a statement to the House about the action that HMRC is taking to rectify overpayments and underpayments in the PAYE system.
The PAYE reconciliation process occurs every year to reflect the changes in people’s earnings and employment status that happen over the course of a tax year. In previous years, HMRC employed a system of manually joining up separate pieces of information through PAYE. Each case of potential overpayment or underpayment had to be reviewed individually before reconciliation could be finalised. That was inefficient and clerically intensive work, and it resulted in a backlog of open cases. HMRC now employs a new computer system that matches records automatically to ensure that the correct amount of tax is paid.
The coalition Government have already started to look at how to reform PAYE further and make it more efficient. As part of the Government’s strategy to create the most competitive tax system in the G20, we are consulting on options to improve PAYE. The PAYE system was introduced at a time when people had one job—perhaps the same job for their whole career—and one source of income in retirement. However, that world has now gone and it is common for people to have earnings from multiple sources. That is well known, but it is something that the previous Government failed to address.
No reconciliation process was undertaken last year, so this year HMRC had to complete the reconciliation for two years instead of one. The preliminary assessment of this year’s reconciliation was first brought to my attention earlier in the summer, and while the majority of PAYE records are correct, we are acting promptly to put right the situation that we inherited, which has contributed to the number of individuals required to make payments and the size of payments owed. About 4.3 million taxpayers will receive repayments between now and Christmas, while 1.4 million will be sent letters specifying how any underpayment has been calculated and how such payments can be reviewed.
To begin the process of reconciliation, HMRC has sent out the first set of taxpayer notifications to individuals throughout the UK. Those individuals who have overpaid will receive a full refund. Those who have underpaid will make additional payments through the PAYE system, provided that the payment due is less than £2,000. If the payment due is more than £2,000, HMRC will contact the individual to discuss the issue. All payments will begin next year and no immediate one-off payment will be required. HMRC will review the responses to the first set of notifications and make any changes needed to operational plans before going ahead with the rest. Staggering the process between now and Christmas will help to ensure that HMRC can deal with all queries efficiently.
The Exchequer is owed a total of approximately £2 billion. The fact that we were left with the worst deficit in peacetime history means that we simply cannot afford to write off all the underpayments. To ensure that the tax system is fair for everyone and that everyone pays their fair share, we are taking action to recoup the funds as painlessly as possible. In cases of genuine hardship, HMRC will allow payments to be spread across a period of three years. As was already the case, it will not pursue cases when the amount owed is less than £300—that is an increase from the previous threshold of £50—which applies to 40% of all underpayments. Of course, in specific circumstances, HMRC will consider writing off underpayments where it can be shown that HMRC was provided with all the information necessary—although I have to tell the House, from historical experience, that that is unlikely to apply to many cases. We do not want to build up people’s hopes unrealistically.
This Government understand that there is an urgent need to reform our PAYE system. In opposition and from day one in government, we have sought ways to improve it. The system is outdated, inefficient and burdensome to the Exchequer and taxpayer alike. We need PAYE to reflect the employment issues that the 21st century presents, and that will be a focus of reforms that we take forward as part of our wider strategy for reform.
I thank the Minister for his technical explanation of the problem. I say at the outset that, given the scale of the problem—6 million people owing or owed perhaps £6 billion—it is disappointing that a Minister was brought here to make that statement and that the Government did not volunteer one earlier.
May I ask for more clarity? Is the number of people affected around the 6 million previously reported, and does the Minister discount the figure of 23 million reported in some of the press today? Is he confident that the previously reported figure for mispayments of £3.8 billion are correct, and does he give any credence to reports in the press today of an additional £3 billion of mispayment error? In short, I am trying to understand the full extent of the problem.
Can the Minister tell the House when those due to receive payments from the Revenue will get them? He confirmed the procedure for the Revenue requesting payment from those who have underpaid, and I am pleased that the offset is now £300, but can he give a cast-iron guarantee that those whose circumstances have changed dramatically—perhaps they have lost their job—will not be hounded for modest payments that they can no longer afford to make?
What action is the Minister taking to ensure that taxpayers are not now the target of fraudsters and scams? To get to the bottom of the matter, although he explained how the problem occurred, can he explain how long such errors have been occurring and when Ministers first knew about them? How could a system so flawed have been allowed to operate as it did? He spoke a lot about PAYE and his intention to reform it, but the public, employers and employees have a right to trust and believe that the PAYE system is reliable and works. What guarantees can he give us today that, after work is done on PAYE, it will be trusted and people’s family and household incomes and budgets will not be shredded, as they may be in the coming year, with demands for back tax because of miscalculations by the Revenue?
First, let I say that I am perfectly happy to answer these questions and I am genuinely grateful for the opportunity to do so.
The hon. Gentleman asked about the backlog of cases. That matter has been well known—I believe that he and I have debated it in the past, and a National Audit Office report published on 30 June gave the most recent update on the position. There is nothing new in the backlog that has emerged in recent weeks. There is a problem and we and HMRC are seeking to deal with it, but it is a problem that has existed for many years and we are critical of the previous Administration for the lack of progress in resolving it. A specific concern that has featured very recently is that it has emerged that, in the last two tax years, 4.3 million people have overpaid tax and 1.4 million have underpaid. Our aim is to send cheques to all those who have overpaid over the course of the rest of the year—in dramatic contrast with previous delays in addressing overpayments.
The hon. Gentleman is right to raise the question of changed circumstances, and it is absolutely right that HMRC considers hardship cases. That is why we have announced today that HMRC will show flexibility in some cases to spread payment over three years. As I said, we are not seeking to pursue the matter mindlessly, without taking account of individual circumstances, especially of those owing large amounts.
The hon. Gentleman also rightly raises the subject of fraudsters, and I am grateful to have the opportunity to reiterate that HMRC will not send e-mails to members of the public; communication will be in writing. Of course, people should be cautious.
How long has this problem persisted? The fundamental problem with PAYE, in the sense of there being too many open cases, and underpayments and overpayments, is a long-standing issue. In part it has to be recognised that, inherently in the PAYE system, there will sometimes be underpayments, because not all the information will be available in-year. For example, all the information about benefits in kind, company cars and so on, will not necessarily be available to HMRC or to employers. That will come to light at the end of the year, and then there will be a need for reconciliation, but that problem has always existed.
The hon. Gentleman specifically asked how long Ministers have been aware of the problem. This Minister has been aware of a problem with PAYE since day one, and that is one reason why we made proposals for reform when in opposition.
The hon. Gentleman asked also about future reform. It is important that there is trust in the PAYE system, and it is right to say that in 85% of cases PAYE is correct in-year, but there are still problems, and we are consulting on proposals so that information is more up-to-date—if you like, so that it is real-time information. That means that HMRC will be able to respond to changed conditions much more quickly, and that we will have a system that is fit for the 21st century, in which people move around, change jobs and have multiple sources of income. We think that that is the direction in which we need to move.
Is it not rather revealing that this question was not tabled by the Labour party, which presided over such a decrepit system for so long? Does not the sheer number of incorrect payments illustrate the need to move to a system that reflects modern working and allows tax payments in real time, rather than on the basis of either guesswork in advance of the tax year or reconciliation a year or two later?
My hon. Friend is absolutely right. As the Government, we are seeking to address the short-term issue, which is the overpayments and underpayments. We cannot just brush them to one side or park them for another year; we need to address them. However, we must also look at the longer-term solution, and that, as my hon. Friend rightly says, means moving towards a much more up-to-date system so that the information is more up-to-date and we are able to respond accordingly.
I understand that tax experts were briefed last week and told that a small number of notifications would be sent out in the next few weeks as the start of a process over the coming months, so why was the House not told, still less the public, what was intended? Why did HMRC’s website initially say absolutely nothing at all? Why has that arrangement, which was set out to a few experts last week, apparently now been abandoned and replaced, if we are to believe the reports over the weekend, with a headlong rush, whereby 6 million new calculations will be sent out in the next few weeks? Where is the plan for handling that huge exercise?
The Minister will have seen the questions that I tabled yesterday, but let me put four of them to him specifically. He has told us that HMRC will consider writing off demands when taxpayers can demonstrate that they provided all the necessary information to calculate their tax correctly. What exactly will they have to show, and how can they do so? If a problem arises because the employer, rather than the employee, has made a mistake, can he confirm that the employer will be held liable for the tax that is due?
Crucially, if people are required to pay more tax for a past year, their net income for that year will be reduced. In many cases, that will mean that they would have been entitled to more benefits—pension credit, housing benefit and council tax benefit—than they were actually paid. Can the Minister confirm that the rule will be changed so that those higher amounts will be paid to those individuals or offset against the extra tax that is due?
Anecdotal evidence suggests that HMRC call-response times have become much worse over the past few months, with many more people not being able to get through. Can the Minister confirm that the deadline for tax credit renewals has been extended from 31 August as a result? Clearly, sending out all those notifications will hugely increase the demand on those call centres, so how will that extra demand be managed? The press reports all refer to tax paid over the past two years. Does the Minister intend that, in due course, HMRC will look at earlier periods as well, or is the exercise limited to those two years?
Of course, it is a good thing that the previous Government’s investment has provided a system that is better able, in particular, to keep track of tax obligations, when people change their jobs or have multiple sources of income, but it is the Minister’s job now to ensure that the extra information that he has is used fairly.
I think we now know why Labour Members did not table an urgent question on this matter.
The right hon. Gentleman asked many questions—although there was not a word of apology for a tax system that is clearly encountering some difficulties—and I will endeavour to answer them all. First, there has been no change of plan. We have pursued the same proposal all along, namely to write to 45,000 to 50,000 taxpayers. We will use the information and the lessons learned from this relatively small sample to guide how correspondence will be undertaken with the remaining taxpayers affected. Let me reassure him that his fears about that are wrong. He also expressed concern about the public not being informed about the exercise, but we made great efforts to inform them over the weekend immediately after the decision was taken to proceed with writing those first letters to affected taxpayers.
The right hon. Gentleman referred to a concession that may be available, and he may recall that the A19 concession is available in circumstances where all the information has been provided to HMRC and it has had the opportunity to address it. We have looked into this. The A19 concession, which is well established—he will remember it from his time in the Treasury—does not apply that often in practice, and I do not want people to build up their hopes that it will offer some kind of panacea; that would be unfair on taxpayers.
The right hon. Gentleman questioned whether employers have made mistakes. In some circumstances, employers will have made the mistake that caused the overpayment or underpayment, but the principle remains the same—we have to collect the right amount of tax.
The right hon. Gentleman asked about means-tested benefits. In some cases, because net income was higher in a previous year, certain means-tested benefits would not have been available in that year, so sums are now having to be paid back. In those particular cases where tax underpayments are being recovered through the tax coding system, the corresponding fall in the net income for the taxpayer will increase the availability of means-tested benefits in that relevant year.
The right hon. Gentleman asked about the extension of tax credit renewals’ deadline, and I can confirm that it has been extended to provide additional time for claims. I have to point out to him, however, that the idea that call centres are under strain and that it is difficult to get through to HMRC is not entirely a new phenomenon: it is a long-standing problem. Let me take this opportunity to say to taxpayers who are understandably concerned about their position that they should wait until they receive a letter before contacting HMRC, as only then will it be able to deal effectively and efficiently with their concerns. Nevertheless, he raises a legitimate issue about call centres. We are providing additional staff—there is additional capacity now and there will be after the tax credit renewal process has been completed. We are taking steps to ensure that HMRC is able to deal effectively with those calling in with concerns.
Does my hon. Friend agree that the previous Government ignored not only the crippling budget deficit but the serious problem with PAYE? That is evidence as to why the coalition’s setting up of the Office of Tax Simplification is so important.
My hon. Friend raises an important point. One of the stresses and strains that HMRC has had to deal with has been the complexity of the tax system. If we can address that, we can establish a simpler PAYE system and reduce the demands placed on HMRC so that it can focus on these very matters.
It would be a disservice to the many millions of people affected—certainly the 1.4 million who are being chased for repayments—if we allowed this matter to be passed over in gaining party political points on either side. [Laughter.] It is not amusing to the 1.4 million people. The report says that it was the Minister who noticed the disparity in the figures and asked for a review. The result is sad, but I commend him for uncovering the problem. This issue raises important questions, and that is why party political point scoring would be wrong. It is not the first debacle from this department. As the Minister looks into it, can the House expect some resignations or disciplinary action in respect of the highly paid chairman and chief executive and board?
I appreciate that the hon. Gentleman has consistently raised concerns about HMRC. In my view, we need to focus on moving forward. The fundamental problem is the PAYE system and the inability, over many years, to bring it into the 21st century. In my view, the days of Treasury Ministers throwing staplers around should be past. We need to work with HMRC constructively to ensure that we have an improvement in our tax system.
While recognising that the Government had to deal with this inherited problem, will my hon. Friend give me an assurance that the Revenue will assist those who have a reasonable basis for showing that they provided the necessary information in good time and that they will not face obstruction or lack of information? Will he assure me that these efforts will not detract from the measures that need to be taken to deal with those who actively evade their taxes, unlike most of the people this problem will affect?
Will the Minister make sure that there are sufficient staff who are able to help vulnerable people unexpectedly facing big bills, with face-to-face discussions about how to deal with that? Last Sunday in my advice surgery, I spoke to a gentleman who is a courier earning £220 a week and has no bank account, but owes £18,000 in back tax because he has constantly had letters that he does not understand referring to extra charges, interest payments and so on. He has not been able to find anyone who can speak to him about the problem. Will the Minister ensure that there are enough staff to speak to people?
I am grateful for that question. It is absolutely right, particularly where those larger sums are involved, that HMRC deals with people sympathetically, and in order for it to do so there needs to be proper communication. That is a challenge for HMRC, but it is absolutely right that it focuses its resources on this matter.
A couple of years ago, HMRC lost my personal information and that of 25 million other people on the child benefit disc, and in my constituency surgeries each week, HMRC problems consistently generate the most casework. In opening the boot—or the bonnet—of the car that is the computer system at HMRC, what other problems is the new mechanic going to find?
HMRC has faced many problems and challenges over recent years: a merger, coping with a complicated tax credits system, and a number of other issues. We need to be realistic about what can be done with our tax system—tax simplification is indeed important—and allow HMRC to focus on its key concerns and do the very important job that it has to do.
Can the Minister outline the costs of this entire operation, and may I endorse the call for people who have underpaid to have the opportunity of face-to-face meetings if there are big demands on them, so that their cases can be heard properly? Can he indicate whether interest will be paid on top of the money to be repaid to those who have overpaid?
On the last point, yes, interest is applicable and a statutory duty. We are not in a position to assess the costs to HMRC. It is worth putting the matter in perspective by saying that most people have had their tax calculated accurately through the PAYE system, and that more will receive repayments than will have to pay extra. People should wait until they receive their letters. It is worth pointing out also that the problem of underpayments has existed in previous years, and many hundreds of thousands of people have had to repay tax through the PAYE system, so the phenomenon is not entirely new, although the scale is somewhat greater now.
May I first congratulate the Minister on moving from the £50 limit to a £300 limit? That will be very helpful. However, many thousands of the 1.4 million people will have changed circumstances. They may now be unemployed, have mortgages or be on short-time working. Will that be taken into consideration? For ever the pragmatist, may I suggest that a direct line be set up for MPs? I imagine that I will have to put a revolving door in my constituency surgery.
I note the hon. Gentleman’s point about a direct line, and I will certainly put that to HMRC management. I reiterate that we accept that there may be hardship, and I am sure his constituents will welcome the announcement today about repayments potentially being spread over three years.
The Minister said that one reason why some payments will have to be so big is that there has not been a reconciliation for two years. Can he explain why moneys were not required back from taxpayers up and down the country last year in the months running up to the general election?
My blood ran slightly cold for a moment when I thought that the TaxPayers Alliance had managed to get in here, but I know that my hon. Friend is a good representative for taxpayers. As for last year, it is fair to say that the introduction of the computer system was a relevant issue, but none the less the lack of a reconciliation has exacerbated the problem. The fact that nothing was done last year prior to the election has left us with a bigger problem this year. He can draw his own conclusions.
May I ask the Minister whether these circumstances have given the Government any further thought about plans to cut the future capacity of the Revenue and Customs? If he is giving positive consideration to the very good suggestion that there be a helpline for MPs, may I suggest, since many of the people affected will not have accountants to hand or be able to go to them, that it be available also to citizens advice bureaux, which will get an awful lot of inquiries?
That is an operational matter that HMRC will need to consider, but I will discuss it with senior management. As far as staffing is concerned, there will be a spending review announcement on 20 October, and any announcements on HMRC’s budgets will be made at that time.
The size of the problem, the number of people affected and the amount of money involved make it a real tragedy for this country. Some 2,000 of my constituents, and the constituents of each and every one of us, will have to stump up more money that is not planned for at a time when money is tight for everyone. May I urge Ministers to have compassion for those who find themselves in a difficult spot, and a review of HMRC, particularly its difficulties in operating computers?
I was a bit disappointed by the Minister being a little dismissive of my right hon. Friend the Member for East Ham (Stephen Timms) when he suggested that it was now getting harder to get through to HMRC. My experience, and that of many MPs, is that when people try to get through to tax credits staff, they just get an answer machine saying that they should phone back another day. They cannot even leave a message.
The situation is getting worse, and although I do not want to blame the Minister for that, may I urge him to consider more than just additional call centres? He should also consider the possibility of providing not just a helpline but more support for bodies such as Citizens Advice and other information agencies. Does he agree that there is a danger of scam e-mails, with people trying to take advantage of those who will be in a difficult position, and that people will need somewhere reputable to get information and support so that others cannot try to get money out of their suffering?
I reiterate that additional resources will be provided for call centres—I believe there will be about 20% extra staff by the end of the month, with contingency for more if needed. HMRC is focusing on that. I welcome the hon. Gentleman’s remarks about tackling fraudsters, and we can take back to our constituents the message that they should be wary, particularly of e-mails. HMRC will not e-mail people about this matter.
A lot has been said during these exchanges, and it may be confusing to some members of the public. May I ask my hon. Friend to give some ABC points to members of the public who have been affected or feel that they may have been, so that it can be recorded properly on tonight’s news?
First, I would say that people should wait until they receive a letter. When they receive one, if they are asked to pay money back they should go through the details carefully, and if they are concerned at that point, they should contact HMRC. They can be reassured that we are not demanding immediate payment, as there will be an opportunity either to spread it out over future months and years or at least to talk to HMRC about the details.
How does the Minister respond to the reports in the national newspapers that certain accountants are suggesting that there is no need to pay back the money, and to the confusion that that will undoubtedly cause many people? He mentioned flexibility in the response to the problem, but are not fairness and consistency also very important, to ensure that everyone is treated exactly the same?
It is right that people pay the tax that is due. I have read the newspaper reports, and it is right to say that a concession is available in some circumstances, but I have been straightforward in making it clear that we do not believe that it will be widespread. People should pay the tax that is due, and given the state of the public finances, we are certainly not in a position to wave goodbye to £2 billion. That would not be fair on those who have paid the correct amount of tax.
My hon. Friend has said that the NPS—the national insurance and PAYE service—system is now up to date and working, within reason, but he has also admitted that PAYE is a 1940s system and not up to date. A consultation is currently going on and is due to shut in about two weeks. One of the problems that he identified was that information can be up to 18 months old. When will we reach the stage of real-time collection, and if it does come in, how and by whom will it be administered?
My hon. Friend is right that we are consulting on moving towards a real-time system. I do not pretend for a moment that it is an overnight solution, but we are examining it so that over the next few years, we can move to a system that gives HMRC, which will of course continue to administer it, information that is up to date and adjustable in-year. That will ensure that we get a much greater level of accuracy in our tax system.
Like all hon. Members, the Minister will have constituents visiting him who have underpaid tax and who will feel that that is no fault of their own, and yet, under the system as it exists, they will be expected to pay back in full. Has he given any consideration to recognising clearly in the amount that must be paid back that our constituents have acted in good faith and that the fault lies elsewhere?
As I said earlier, concession A19 is for taxpayers who have acted in good faith when HMRC has had an opportunity to respond. However, I should also make the point that PAYE has always involved circumstances in which information comes to light after the tax year is completed and an adjustment must be made. That has happened throughout the existence of PAYE, but it has increased over the years as working patterns have changed, which is why we need to look at more fundamental reform of PAYE.
It would seem that the left hand of HMRC does not know of the information held in the right hand. What assurance can the Minister give to members of the public that such information can be better co-ordinated to ensure that such mistakes do not happen again?
The hon. Gentleman makes a good point. To be fair, the NPS system brings the information together, but unfortunately, that has highlighted more difficult cases. In fact, as we move forward with the NPS system and—potentially—further reforms, HMRC should have more accurate information and so be able accurately to assess the level of tax due.
I am tempted to ask whether the person who designed the computer system for HMRC is the same as the person who designed the computer system for claiming MPs’ expenses, but I shall resist, and instead ask the Minister this: why has he alighted on the period of only three years for people to make payments? Is it not the case that people on very low incomes may need longer if they are hit with particularly large bills?
The period of three years is one in which we have confidence that HMRC will be able to address the matter administratively. Beyond that, certain technical matters would need to be thought through. However, we are confident that HMRC is capable of addressing the matter over three years.
Does the Minister agree that the position of front-line staff in HMRC centres up and down the country is important? They do a stressful job at the best of times and regularly deal with frustrated taxpayers on the phone, but with the new problem, I am sure the Minister agrees that the staff’s position needs to be looked at. A statement of support for them from the Minister would be welcome.
I am grateful for the hon. Gentleman’s question. Some comments have suggested that the situation is the fault of HMRC staff who cannot add up, but those comments are ill-informed. The truth is that HMRC staff are committed to doing a good job. They are battling with a difficult system, and I give them my support. As a Minister, I have visited many HMRC offices, and I appreciate the hard work, enthusiasm and dedication of HMRC staff.
Does my hon. Friend appreciate that if the head of HMRC was instead the finance director of a financial services company that was seeking to claw back that sort of money from customers, he would be obliged to take himself off to Canary Wharf and satisfy the Financial Services Authority that he had complied with the requirements to treat customers fairly? Is the Minister satisfied that the mechanisms that he has outlined, including the period for repayment and other things, would satisfy the same approach that the FSA would take in relation to a private company?
The Minister is responding excellently to the question, but I must say to him gently that it would have been better had he made a statement rather than being asked to come to the House.
PAYE has always been a collection of money on account towards the final tax liability, but the Minister has not made it clear to me whether a great number of people are affected by the current situation just because people’s lifestyles have changed. Was there also an error in the basic collection by the Revenue of the correct information given by taxpayers?
Our understanding is that the fundamental problem is changing working practices—that is the long-term issue. Of course, there may be circumstances in which HMRC has made errors, but changing working practices is the essential problem. It is also the case that the new computer system more accurately and rigorously picks up problems than happened before. That is why we have seen the increase in underpayments and overpayments. However, my hon. Friend is absolutely right that there have always been underpayments and overpayments under the payment-on-account PAYE system.
I welcome my hon. Friend’s statement. The relationship between taxpayer and tax collector is extremely important. Many of my constituents find the fact that it is extremely difficult to get through to the Revenue at the moment very stressful, which they must do through no fault of their own, as other hon. Members have said. Will the Government look at that relationship and ensure that it is valued, so that both HMRC staff, who do an excellent job, and its customers, are treated the same way as we would expect in any public service?
May I congratulate the Minister on taking prompt and appropriate action on this inherited fiasco? Much mention has been made of telephone hotlines and so on, but the vast majority of people who receive requests or demands for the return of unpaid tax will not have advisers or anyone to assist them. Will he make an effort to ensure that the letters that are sent to our constituents are in plain English and easy to understand, and that they contain appropriate calculations that the individual taxpayer can appreciate and understand, so that they can make their decisions without recourse to either MPs, tax advisers or accountants?