The government has announced that the Treasury will cancel the tax debts of some of people who owe money as a result of errors in the PAYE system.
HM Revenue and Customs (HMRC) has already conceded that mistakes in calculating the exact amount of tax due under the system has meant that as many as six million people may have paid incorrect amounts of tax over the past two years.
Some £2 billion has been underpaid, leaving about 1.4 million taxpayers owing some £1,400 each, while as much as £1.8 billion in overpayments may have been collected from 4.3 million people.
Letters are being sent by HMRC to those affected.
However, Treasury Secretary, David Gauke has announced that anyone who has been undercharged by up to £300 in the past six tax years will see the debt waived.
Those who owe between £300 and £2,000 could have up to three years in which to pay rather than the usual one year. The money would be reclaimed through amendments to taxpayers’ PAYE codes.
Mr Gauke, who was answering an emergency question in the House of Commons, insisted that the government could not afford to cancel all of the debts.
He said: “In total the Exchequer is owed approximately £2 billion. Being left with the worst deficit in peacetime history means we simply cannot afford to write off all of these underpayments.”
But he added that the government will take action to soften the impact and to resolve the issue “as painlessly as possible”.
The Minister continued: “In cases of genuine hardship, HMRC will allow payments to be spread across a period of three years. As was already the case, HMRC will not pursue cases where the amount owed is for less than £300 – that’s an increase from the previous threshold of £50 – and this applies to 40 per cent of all underpayments.”
But HMRC said that those who owe £300 or less were not included in the total of underpayments announced previously, which means that the 40 per cent who will benefit from the waiver would be on top of the 1.4 million already cited as having underpaid.
Mr Gauke also had words of caution for taxpayers who plan to appeal against the charge.
He said: “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 that from historic experience, this is unlikely to apply to many cases and we do not want to build up people’s hopes unrealistically.”
John Whiting, tax policy director at the Chartered Institute of Taxation, commented: “This is a pragmatic approach from the government, though it raises further questions. For example, what about people who have been told previously by HMRC that they owe between £50 and £300? Will the new threshold apply to them too?
“The minister’s announcement that there will be extra call centre staff is particularly welcome. It is something we have called for – lots of people will have lots of questions for the taxman. It is important that they have access to the help and advice they need.”