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Taxation: Income Tax

Volume 721: debated on Monday 11 October 2010


Asked by

To ask Her Majesty’s Government what rate of interest they propose to pay to people who have paid too much income tax because of mistakes by HM Revenue and Customs; and what rate of interest they propose to charge people who have paid too little income tax for the same reason.

My Lords, HMRC interest rates are linked to the Bank of England base rate and are currently 3 per cent on late payments and 0.5 per cent on repayments. The interest position in instances of error or delay by HMRC is considered on a case-by-case basis.

Underpayments arising from the current end-of-year PAYE reconciliation exercise will not attract an interest charge, provided that people who have been notified of an underpayment contact HMRC and agree a payment arrangement.

My Lords, I am grateful to my noble friend for that helpful reply. The situation in Her Majesty's Revenue and Customs is another example of the problems which have been left by the previous Government. My noble friend will be aware of the disturbing and complacent evidence which was given to the Treasury Select Committee in another place on 15 September. Apart from the uncertainty and distress which has been caused to something like 6 million taxpayers and the minimal rate of interest which is being paid to those to whom Revenue and Customs now propose to refund something, a large amount of money has been written off. What is the overall cost of what has happened in the department, against a background of trying to cut public expenditure?

My Lords, as my noble friend points out, this is another part of the inheritance which we are getting on with having to tidy up. On his specific questions, I can only apologise to the taxpayers who are caught up in this reconciliation exercise. We are trying to make the process as painless as possible. The bills for those owing less than £300 are being written off. That will entail a cost of some £600 million. The cost of the overall exercise, in which 90,000 letters a day are going out between now and Christmas to clear it up, will be up to £10 million.

My Lords, in the light of the very low rates of interest involved in this procedure, does the Minister accept that for most taxpayers, what matters most is not the rate of interest but the speed with which repayments are made? Can he give the House an assurance that HMRC is taking every possible step to make repayments as quickly as possible?

My Lords, it is worth reminding ourselves that the great majority of PAYE self-assessments are done online—by 75 per cent of people who are self-assessed. For that largest group of taxpayers, repayments are in the ordinary course made as soon as two to three working days from filing, although there may be a slight delay in the peak in the year around 31 January. For the sort of exercise we are talking about, repayments are normally made within seven working days. That is indeed the thing to focus on rather more than the precise rate of interest.

The amount of tax which is now due under this reconciliation exercise is some £2 billion from 1.4 million taxpayers, although, as I said, all amounts under £300 individually, which is for about 900,000 taxpayers, will be written off.

My Lords, the House will agree that underlying the interesting question from the noble Lord, Lord Higgins, is the notion that HMRC should be fair. It seems to be very unfair that the rate of interest charged on unpaid balances is six times greater than the rate of interest provided on repayments when the Revenue for some reason or other has made a mistake. Does the noble Lord believe that HMRC should be fair? Given the extensive misuse of that word on the Benches opposite, will he define for us what fairness in taxation means?

My Lords, the previous Government brought in the current interest rate regime within the past year, and after extensive consultation, on the basis that late payments are calculated at 2.5 per cent over the bank rate and repayments are 1 per cent less than the bank rate, subject to a minimum of 0.5 per cent. This regime is similar to that of other countries ranging from Australia to the United States. Indeed, of the six or eight countries surveyed, Japan is the only one that does not apply differential rates to payments and repayments. So, in that sense, the system does reflect a due degree of fairness.

My Lords, can the Minister reconcile his comments about fairness with the reported remarks in the Financial Times of 19 August from Mr David Hartnett, the Permanent Secretary in HMRC, that he proposes henceforth to take a gentler and easier line on tax avoidance?

My Lords, I do not have the precise context in which Mr Hartnett made those remarks. However, in relation to the PAYE reconciliation exercise that we are talking about, the fact that interest is being waived for people who have underpaid, that balances under £300 are being written off and that those who do have to make further payments will be able to make them over a number of years, particularly where hardship is concerned, represents an appropriate response in this case.