Why HMRC are right to collect underpaid PAYE

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A commentator on this site has said in response to a blog post on the news story that HMRC have found millions of people have both underpaid and overpaid tax:

This raises a real moral dilemma, which is why I visited this site today. The crux of the TJN is that taxpayers often get too literal with the Tax Code and abuse the spirit of it by emphasising the letter of it. Here we now have HMRC saying we have made an error, but the letter of the law allows us to claw it back. So - should HMRC stick with the spirit (”we give you a code and you just pay up and relax”) or the letter of the law (”we reserve the right‚Ķ”). And if the letter of the law is good enough for HMRC, why is it not good enough for taxpayers who contribute to the tax gap through legal means of tax planning?

Let’s unpack this.

First, using the logic noted those owed refunds would not get them. I can’t see any way they would be happy about this. And I can’t see justice is one thing for taxpayers and another for the government, so straight away those arguing they do not owe tax have a problem — of withstanding the wrath of those to whom they will deny repayments HM Revenue & Customs intends to now pay, and rightly so.

Second, let’s be quite clear about what PAYE is. It’s a payment on account of tax liabilities. It is not now, has never been,. and never will be a method for assessing the right amount of tax that a taxpayer owes. It cannot be because a) not all income data will be known during the course of a tax year b) not all circumstances are known during the course of a tax year c) not all data can be processed during a year and d) it’s just not able to handle some situations very well — like people with multiple jobs.

PAYE is nonetheless an extraordinarily efficient way of a) collecting tax from people as they earn so that they do not, in most cases have to estimate this tax liability themselves b) keeping the government funded without recourse to borrowing c) ensuring most people, most of the time pay most of what they owe with few surprises resulting.

I make this point with good reason. The PAYE system collects most income tax and national insurance owing (the total was about £135bn income tax and £95 billion NIC in 2009-10, not all through PAYE — but largely so) and in this context the errors are small. That is not to dismiss them — but to get them in proportion is appropriate. Few governments could do the job as well as this!

But that being said — let me reiterate — PAYE is not a tax assessment system — it is a system for making tax payments on account. That's all. The obligation to make sure the right tax is paid is the taxpayer’s and the taxpayer’s alone. Any taxpayer can if they wish, or if they are in doubt as to whether they have paid the right amount of tax do a tax return, on line, and if submitted on time HMRC will always do the tax calculations on he basis of the tax return and confirm whether any additional tax is owing, or not. This is the only legal way for a taxpayer to ensure that the right sum of tax is owing — and it is their duty to declare completely and absolutely accurately all sources of income and all claims they have. If not penalty is due. And rightly so. The law would have been broken.

PAYE does not remove that obligation.

And let me be candid — almost all those who now have tax liability will know, or should know, they have such liability. That is because the vast majority will relate to the non-processing of company car data. If a person got their notice of coding from HMRC, had a company car, and saw they were not being taxed on it. Of course it may have been another benefit. And they’d have known they got it, because their employer has to give them a copy of form P11D sent to HM Revenue & Customs. And despite seeing that their code was not being adjusted for the benefit they got they took no action to correct the situation by submitting a tax return, which they could have done. candidly, I suspect a great many hoped they’d get away without paying the tax. And now they won’t.

Nor should they.

The Revenue made an admin error — and I will argue forever that HMRC is at fault for cutting staff when it need not have done, so causing this problem. But that’s all they did. The taxpayer in these cases made the legal error of omission. To excuse them tax now when they have knowingly not paid tax would be wholly unjust — to all who have paid their tax, for a start.

So HMRC have not made the legal error. The taxpayer has.

HMRC is not abusing the tax code. It is properly, albeit belatedly enforcing it.

And that’s just what we should expect them to do.  Tax is not due on a  whim. Tax compliance is easy to identify and should be upheld. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. In this case the taxpayer has not done then when they could have done by submitting a tax return which they chose not to do.

So there is no moral dilemma here.

And let's also be clear — tax planning does not contribute to the tax gap. Tax avoidance and tax evasion and unpaid tax does. They’re the abuses iof the law. To not collect this tax would be an abuse of the law. To not collect would increase the tax gap. And that we cannot afford — and there’s no reason why we should afford it.

So I have only one concluding remark — that HM Revenue & Customs need to provide time to pay this tax. That’s fair. But collect it they must.

And there’s absolutely no question that the spirit of the law says otherwise. The spirit of the law is not a misreading of the law. The spirit of the law upholds the law — and to waive this tax would be against the spirit of the law.

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